What is the Hindenburg Omen?
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 to a predetermined reference percentage to predict the increasing likelihood of a market crash. Named after Germany's Hindenburg airship that crashed on May 6, 1937 it was conceived and promoted by James R. Miekka.
- 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 lows to a predetermined reference percentage to predict the increasing likelihood of a market crash.
- The Hindenburg Omen is confirmed if during the 30-day period the MCO is negative, and rejected if the MCO turns positive.
Understanding the Hindenburg Omen
Given the inherent upward bias that is built into the composition of most stock markets, any occurrence that is abnormal usually leads to a flight-to-safety response from investors. This facet of investor psychology is, arguably, the single most relevant factor that leads to precipitous market declines, or market crashes.
The Hindenburg Omen looks for a statistical deviation from the premise that under normal conditions, securities are either making new 52-week highs or 52-week lows. The abnormality would be if both were occurring at the same time. According to the Hindenburg Omen, an occurrence such as this is considered to be a harbinger of impending danger for a stock market. The signal typically occurs during an uptrend, where new highs are expected and new lows are rare, suggesting that the market is becoming nervous and indecisive, traits that often lead to a bear market.
Main Criteria for a Hindenburg Omen Signal
- 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 2.2 percent).
- 52-week highs cannot be more than two times the 52-week lows. This is a must.
- Positive recent trend: The stock market index should still be in an uptrend. A 10-week moving average, or the 50-day rate of change indicator, is used to indicate that this is indeed the case.
- The McClellan Oscillator (MCO) is negative.
Once these 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 the MCO is negative during the 30-day period and rejected if the MCO 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 confirmation. 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 the Hindenburg Omen
The following chart shows an example of the Hindenburg Omen in an S&P 500 SPDR (SPY) chart.
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 could have exited their long positions following the Hindenburg Omen and avoided the market decline in the aftermath of the indication.