What is the Hindenburg Omen?

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 in stock prices to a predetermined reference percentage that is supposed 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 in 2010. It was reported that it had correctly predicted a significant stock market decline only 25% of the time.

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.

Conditions of the Hindenburg Omen

  • Volume: If the number of issues in a specific exchange hits 52-week highs and lows and exceed 2.8% of the total number of issues in the exchange, it acts as what one would call entering the ‘early phase’ of the Hindenburg Omen
  • Benchmark index: The benchmark index (an index created to represent the total market including several securities) for the exchange must be greater than its value 50 trading days ago
  • McClellan Oscillator: The McClellan Oscillator is a market breadth technical indicator used to evaluate the number of advancing and declining stocks in an exchange. Once the first two conditions are met, the signal is ‘active’ when MCO is negative and vice versa.

Other characteristics that define the Hindenburg Omen:

  • The stock market must be rallying, typically measured by the 10-day moving average.
  • 52-week highs must not be twice as much as 52-week lows.
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Main Criteria for a Hindenburg Omen Signal

Four criteria must be met to signal a Hindenburg Omen:

  • 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%).
  • The 52-week highs cannot be more than two times the 52-week lows.
  • The stock market index is still in an uptrend. A 10-week moving average, or the 50-day rate of change indicator, is used to indicate this.
  • The McClellan Oscillator (MCO), a measure of the shift in market sentiment, is negative.

Once these conditions are met, the Hindenburg Omen is considered 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 escaped the 1987 market crash and the 2008 financial crisis.

Of course, since the omen’s rate of success is estimated at only 25%, they also would have jumped unnecessarily a number of times. Traders might 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.

Criticisms of the Hindenburg Omen

Despite its accolades and a fool-proof logic, the Hindenburg Omen is said to come with certain caveats. Claimed by some to offer a 25% accuracy, the validity of the Hindenburg Omen remains debatable. Some unfortunate consequences of the indicator are:

  • False signals: It is very possible that the stock market remains bullish despite signaling an active Hindenburg Omen, although it’s been mostly accurate for the past 35 years. The consequences of several traders interpreting the omen and preparing for a crash when there isn’t going to be one can be severe and affect several people’s financial livelihoods.
  • Skewed data: It is also argued that several non-cap stocks and non-stock exchange-traded funds often skew the data by misinforming the market about its true breadth and volume.
  • Outside Effect: Several ETFs within an exchange track foreign stocks and are also found in the NYSE or NASDAQ. If the nature of international stocks is bearish, it may wrongfully misinform investors about the U.S. market despite U.S. stocks being in good condition.
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All in all, the Hindenburg Omen is an important technical indicator that’s proven its worth over the years. However, there is always a certain amount of caution that must go into interpreting signals in a stock market, so the Hindenburg Omen is not the only one a trader must rely on.

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