What is the Hindenburg Omen
The Hindenburg Omen is a technical indicator that compares the number of 52-week highs and lows to predict the likelihood of a market crash. It was named after Germany's Hindenburg airship that crashed in the late 1930s and promoted by James R. Miekka.
BREAKING DOWN Hindenburg Omen
The Hindenburg Omen is based on the premise that normal market conditions entail most securities making new 52-week highs or 52-week lows. If both are occurring at the same time, the Hindenburg Omen predicts that there could be trouble brewing ahead. The signal typically occurs during an uptrend when there are still many new highs, but a growing number of new lows suggest that the market is becoming bearish and indecisive.
There are two criteria for a Hindenburg Omen:
- New Highs and Lows - The daily number of new 52-week highs and 52-week lows in a stock market index are greater than a threshold amount (typically 2.8 percent).
- Positive Recent Trend - The stock market index is greater in value than it was 50 trading days ago. In other words, the 50-day rate of change indicator should be positive.
Once these two conditions are met, the Hindenburg Omen is active for 30 trading days and any additional signals during that period should be ignored. The Hindenburg Omen is confirmed if, during the 30 day period, the McClellen Oscillator (MCO) is negative, and disconfirmed if the McClellen Oscillator turns positive.
Traders using the indicator will go short, or exit long positions, when the MCO turns negative during the 30 days following a Hindenburg Omen. By doing so in the past, traders could have avoided many significant market downturns. Of course, traders should use the indicator in conjunction with other forms of technical analysis to provide further confirmation of a sell or take-profit signal. For example, traders might look for a breakdown from key support levels before going short or taking profit on a long position.
Example of Hindenburg Omen
The following chart shows an example of the Hindenburg Omen in an S&P 500 SPDR (SPY) chart.
Chart courtesy of TradingView
In this example, the shaded area represents where the Hindenburg Omen conditions were met. The S&P 500 moved sharply lower on high volume just one month after the indicator suggested that traders should brace for a bear market. Traders may have exited their long positions following the Hindenburg Omen and avoided the market decline in the aftermath of the indicator.