Hindenburg Omen

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The Hindenburg Omen is a technical analysis signal that attempts to predict a forthcoming stock market crash. It is named after the Hindenburg disaster, the crash of the German zeppelin of the same name in May 1937.

The Hindenburg Omen is the alignment of several technical factors that measure the underlying condition of the stock market - specifically the NYSE - such that the probability that a stock market crash occurs is higher than normal, and the probability of a severe decline is quite high. The rationale behind the indicator is that, under normal conditions, either a substantial number of stocks establish new annual highs or a large number set new lows - but not both. When both new highs and new lows are large, it indicates the stock market is undergoing a period of extreme divergence. Such divergence is not usually conducive to future rising prices. A healthy market requires some degree of internal uniformity, whether the direction of that uniformity is up or down.

1 Origins
2 Criteria
3 Conclusions
4 External link

[edit] Origins

The origins of this potential stock market crash signal can be traced back to the work of Norman Fosback, author of Stock Market Logic, first published in 1976. Fosback did research on share price highs and lows and developed the first version of the indicator, although it differed from the one used at present. Credit for discovery of the Omen is given to Jim Miekka who wrote a report called the Sudbury Bull and Bear Report. Miekka derived the indicator from a New High - New Low methodology developed by Gerald Appel many years before. Miekka's friend Kennedy Gammage suggested to Miekka that the indicator be dubbed the Hindenburg Omen after the ill-fated zeppelin doomed to crash.

[edit] Criteria

The traditional definition of a Hindenburg Omen has five criteria:

That the daily number of NYSE new 52 Week Highs and the daily number of new 52 Week Lows must both be greater than 2.2 percent of total NYSE issues traded that day.
That the smaller of these numbers is greater than 79.
That the NYSE 10 Week moving average is rising.
That the McClellan Oscillator is negative on that same day.
That new 52 Week Highs cannot be more than twice the new 52 Week Lows (however it is ok for new 52 Week Lows to be more than double new 52 Week Highs). This condition is absolutely mandatory.

These measures are calculated each evening using Wall Street Journal figures for consistency.

The occurrence of all five criteria on one day is often referred to as an unconfirmed Hindenburg Omen.

A confirmed Hindenburg Omen occurs if a second (or more) Hindenburg Omen signals occur during a 36-day period from the first signal.

[edit] Conclusions

The probability of a move greater than 5% to the downside after a confirmed Hindenburg Omen within the next 41 days after its occurence is 77%, the probability of a panic sellout is 41% and the probability of a real big stock market crash is 25%.

The occurence of a confirmed Hindenburg Omen does not necessarily mean that the stock market will go down. On the other hand there has never been a significant stock market decline in history, that was not preceded by a confirmed Hindenburg Omen.