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How to Trade: The Hindenburg Omen Stock Market Crash

(Article updated with information on market reaching a second Hindenburg Omen on Aug. 19.)

NEW YORK ( TheStreet) -- If it feels as though you can't pull the trigger on a trade today without first consulting the Hindenburg Omen, you are not alone -- and TheStreet has help for you to avoid the stock market crash that, at this point, it may seem like the Hindenburg Omen all but guarantees.

The Hindenburg Omen is a somewhat obscure technical indicator that has suddenly become a market blog sensation. Last weekend, unlike the doomed German airship which crashed and burned (before providing a name for the bearish market signal) the Hindenburg Omen soared to become one of the most popular Google search terms. It's possible that only Federal Reserve chairman Ben Bernanke has more power to move the markets right now.

Now, according to Sentimentrader.com we had a second Hindenburg Omen trigger yesterday. Some technicians regard this as confirmation of the first reading and, therefore, a much more dire situation.


Should investors be keeping their finger on the panic button as a result of a technical indicator that many investors may have not even known about just a few days ago?

One of the main criteria for the Hindenburg Omen to be triggered is a negative reading in the McClellan Oscillator. The McClellan Oscillator is a technical indicator that relates to the market breadth, or what is known as the daily advance-decline line, tracking the difference between the number of stocks moving both higher and lower. As long as the McClellan Oscillator is positive, there is no Hindenburg Omen.

TheStreet recently caught up with Tom McClellan, editor of the McClellan Market Report, and Son of the McClellan Oscillator -- Tom's father Sherman McClellan invented the Oscillator. McClellan said investors might want to take a step back -- and take a more comprehensive view of the market outlook -- before betting all, or selling all, on the Hindenburg Omen.

TheStreet:There's been a healthy level of debate about the Hindenburg Omen, with some blogs quoting figures that it's only proven to be successful 25% of the time. Why should investors pay attention to the Hindenburg Omen at all?

McClellan: My response to the criticism that the Hindenburg Omen has only worked 25% of the time is to ask, What's the track record of a railroad crossing? Plenty of times a railroad crossing signal is triggered but there is no train. When one of these warnings is signaled, an investor needs to remember that it's simply telling you conditions exist for something to happen, but it doesn't necessary mean it will happen. It's nice to know, more or less.
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