The Hindenburg Omen is a technical indicator that was designed to signal the increased probability of a stock market crash. It compares the percentage of new 52-week highs and new 52-week lows in stock prices to a predetermined reference percentage that is supposed to predict the increasing likelihood of a market crash.
Named after Germany’s infamous Hindenburg airship that crashed in 1937, the concept was introduced by James R. Miekka in 2010. Historical data suggests it has correctly predicted significant stock market declines roughly 25% of the time.
Key Takeaways
- The Hindenburg Omen aims to signal a higher probability of a market crash.
- It compares the percentage of new 52-week highs and lows to a predetermined benchmark.
- Though not always accurate, it serves as a useful tool in conjunction with other forms of technical analysis to determine when it might be time to sell.
Understanding the Hindenburg Omen
Given the inherent upward bias in most stock markets, any abnormal occurrence often spurs a “flight-to-safety” response from investors. This aspect of investor psychology is crucial in triggering sharp market declines or crashes.
The Hindenburg Omen looks for a statistical deviation from normal conditions where stocks are either making new 52-week highs or lows. It is considered abnormal if new highs and new lows occur simultaneously.
When such discrepancies are identified, it serves as a harbinger of potential market danger. The signal usually manifests during an uptrend, where new highs are expected and new lows are rare. This implies market indecisiveness and nervousness, traits that often foreshadow a bear market.
Main Criteria for a Hindenburg Omen Signal
Four primary conditions must be met to trigger a Hindenburg Omen signal:
- The daily number of new 52-week highs and lows in a stock market index exceeds a threshold (typically 2.2%).
- The number of 52-week highs must not be more than twice the 52-week lows.
- The stock market index is still in an uptrend, confirmed by a 10-week moving average or a 50-day rate of change indicator.
- The McClellan Oscillator (MCO), which measures market sentiment, must be negative.
Once these conditions are satisfied, the Hindenburg Omen remains active for 30 trading days. Any additional signals during this period should be disregarded. The signal is confirmed if the MCO remains negative during these 30 days and invalidated if it turns positive.
Traders utilizing this indicator may go short or sell long positions when the MCO turns negative plus 30 days after a confirmed Hindenburg Omen.
Historically, employing these strategies might have helped traders avoid losses during events like the 1987 market crash and the 2008 financial crisis. However, given the omen’s 25% success rate, false alarms are common. Many traders use it alongside other forms of technical analysis to get solid sell or take-profit confirmations, such as observing a breakdown from key support levels.
Example of the Hindenburg Omen
Image by Sabrina Jiang © Internotional/2021
In this example, the shaded area on an S&P 500 SPDR (SPY) chart met the Hindenburg Omen criteria. The market dropped sharply about a month after the indicator flagged an impending bear market. Traders might have avoided the decline by exiting long positions when the Hindenburg Omen appeared.
Related Terms: technical indicator, market crash, bear market, flight-to-safety, McClellan Oscillator.
References
- The Wall Street Journal. ‘“Hindenburg Omen’ Flashes: Technical Gauge and Its Creator Sense Stock Gloom; ‘Good Conspiracy Theories’?”
- The Wall Street Journal. “Jim Miekka, Creator of ‘Hindenburg Omen,’ Dies in Crash”.
