by Ian Harvey
Definition of Hindenburg Omen
The Hindenburg Omen is a technical analysis pattern that is said to portend a stock market crash. It is named after the Hindenburg disaster of May 6, 1937, during which the German zeppelin Hindenburg was destroyed.
The famous German airship known as the Hindenburg became one of history's most prevalent images of disaster when it burst into flames while making a landing in 1937. This airship now shares its name with this technical tool that was invented to help traders predict/avoid a potential stock market crash.
Investopedia states that the Hindenburg Omen is a technical indicator named after the famous crash of the German airship of the late 1930s. The Hindenburg omen was developed to predict the potential for a financial market crash. It is created by monitoring the number of securities that form new 52-week highs relative to the number of securities that form new 52-week lows - the number of securities must be abnormally large. This criteria is deemed to be met when both numbers are greater than 2.2% of the total number of issues that trade on the NYSE (for that specific day).
Explanation of Hindenburg Omen
Traders use an abnormally high number of 52-week highs/lows because it suggests that market participants are starting to become unsure of the market's future direction and therefore could be due for a major correction. Proponents of this indicator argue that it has been very accurate in predicting sharp sell-offs in the past and that there are few indicators that can predict a market crash as accurately.
The Hindenburg Omen is a combination of technical factors that attempt to measure the health of the NYSE, and by extension, the stock market as a whole. The goal of the indicator is to signal increased probability of a stock market crash.
The rationale is that under "normal conditions" either a substantial number of stocks may set new annual highs or annual lows, but not both at the same time. As a healthy market possesses a degree of uniformity, whether up or down, the simultaneous presence of many new highs and lows may signal trouble.
The Omen is largely based on Norman G. Fosback's High Low Logic Index (HLLI). The value of the HLLI is the lesser of the NYSE new highs or new lows divided by the number of NYSE issues traded, smoothed by an appropriate exponential moving average.
The Omen itself is said to have originated with Jim Miekka, and the name was suggested by the late Kennedy Gammage.
Jim Miekka has never worked on Wall Street and doesn't hold any financial degrees. But he has developed a cult-like following among some investors.
Mr. Miekka is 50-years-old ,and is a newsletter writer, who is in big demand these days because of a technical market indicator he devised to predict stock-market crashes. Dubbed "the Hindenburg Omen" after the 1937 disaster of a German passenger airship, the indicator has been the buzz of talk shows, blogs and news articles after developing a following on trading floors from New York to London.
Mr. Miekka devised the indicator using a formula that parses data including 52-week stock levels and moving averages of the New York Stock Exchange. Other criteria include a rising 10-week NYSE moving average and a negative technical indicator that measures market fluctuations. All these gauges must occur simultaneously on the same day to trigger the Hindenburg Omen.
Mr. Miekka's foray into stocks began after he was injured while conducting experiments at a Massachusetts mine, where he was trying to find a better way to extract minerals from rock. There was an explosion from chemicals he was working with, and was blinded by complications during an ensuing eye operation. "The last thing I saw was the eye chart going into surgery," he said.
As he recuperated, Mr. Miekka said he began listening to television shows that focused on investing, and began actively putting his money into the market.
He came up with his first trading "system" in 1989. Now, he is working on a number of other indicators, such as a short-term five-day buy signal based on the trading patterns of two market averages over the past 25 days.
Mr. Miekka, who publishes the "Sudbury Bull & Bear Report," said his newest indicator has been "very effective." But he is keeping the indicator's name and the names of the averages to himself.
Criteria for the Hindenburg Omen
Complex and esoteric even in the world of technical indicators, the Hindenburg Omen is triggered when the following occurs:
• 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% of total NYSE issues traded that day.
• The NYSE's 10-week moving average is rising.
• The McClellan Oscillator (a technical measure of "overbought" vs. "oversold" conditions) is negative on that same day. (See full explanation below)
• New 52-week highs cannot be more than twice the new 52-week lows. This condition is absolutely mandatory.
The traditional definition requires each condition to occur on the same day. Once the signal has occurred, it is valid for 30 days, and any additional signals given during the 30-day period should be ignored. During the 30 days, the signal is activated whenever the McClellan Oscillator is negative, but deactivated whenever it is positive.
These criteria are calculated daily using Wall Street Journal figures for consistency. (Other exchanges may be used as well.) Some have been recalibrated by Miekka to reduce statistical noise and make the indicator a more reliable predictor of a future decline.
Problems Associated with the Hindenburg Omen
To eliminate false positives some technical analysts have imposed the condition that the Hindenburg Omen:-
• must be triggered three times in a row within a month from the first triggering event for said initial trigger signal to be considered to be valid (i.e. requires double confirmation).
• is only valid when "all tightly coupled triggerings are within a fortnight".
• will indicate a possible future downturn or correction, depending on the magnitude of any "one off" triggering.
The Hindenburg Omen has a roughly 25% accuracy rate in predicting big market upheaval since 1987, meaning it's far from infallible but isn't inconsequential either. The indicator's creator, mathematician Jim Miekka, compares the Hindenburg Omen to a funnel cloud that precedes a tornado.
"It's like a funnel cloud," Mr. Miekka says. "You don't get a storm with every funnel cloud, but now that we're seeing several funnel clouds, I definitely think I want to stay in the storm cellar."
"It doesn't mean [the market's] going to crash, but it's a high probability," he said.
Occurrences of the Hindenburg Omen
Hindenburg Omen 1985-2008
Here is a historical graphical roadmap of what to expect after a confirmed Hindenburg Omen. All the charts below have a start date on the day of a confirmed Omen and an end date of the bottom.
• August 12, 2010: The Omen's creator, Jim Miekka, considered the Omen officially triggered on this date with 92 and 81 new 52-week highs and lows, respectively. The McClellan Oscillator was a negative -120.03 and the 10-week NYSE moving average was rising; the market closed above its open of 50 days prior (May 27). In the ensuing week, the Omen narrowly missed confirmation twice (August 13 and 19).
• August 20, 2010: According to the Wall Street Journal, the omen was confirmed on Friday, with 83 new 52-week highs and 95 new 52-week lows on the NYSE. The McClellan Oscillator was a negative -106.46 and the 10-week NYSE moving average was rising; the market closed above its open of 50 days prior (June 11). Shortly thereafter, its creator, Jim Miekka, reportedly sold all his stocks.
Accuracy of the Hindenburg Omen
• Every trader longs to be able to predict a stock market crash in order to profit from the decline or to protect some of their hard-earned profit. The Hindenburg omen is nearly as good as it gets when it comes to being able to identify these crashes before they happen.
• The omen has appeared before all of the stock market crashes, or panic events, of the past 25 years. Having a signal that can generate sharp market declines is appealing to all active traders, but this signal is not as common as most traders would hope.
• Although this indicator does not provide frequent signals, it should be considered worthy to incorporate it into a trading strategy because it could allow traders to dodge a major crash.
Further Accuracy Interpreted
Technicians are always looking to hone the accuracy of a given signal and the Hindenburg omen is no exception. Traders have added other confirming conditions, besides the ones listed above, in an attempt to reduce the number of false signals that are generated.
Most traders will require that the number of new highs not exceed twice the number of new lows when the signal is generated. By monitoring the advancing and declining issues, traders can ensure that the demand for a broad range of securities is not slanted in the bulls' favor. A lack of securities trading near the upper end of their 52-ranges is a representation of the deficient demand in the market and can be used to reconfirm the prediction of a move downward.
The final piece of confirmation that traders will watch for is other transaction signals occurring in close proximity to the first. A cluster of Hindenburg omen signals, generally deemed to mean two or more signals generated within a 36-day period, is often interpreted to be much more significant than if only one signal appears by itself. All of the confirmation criteria that are mentioned in this article are suggestions of how to create a more accurate prediction of a market crash, but keep in mind that these can be forgotten if the trader would rather use the traditional methods.
An Example of “A Hindenburg Omen" Tracking Chart
The Omen signal looks at the ratio of NYSE New Highs and New Lows to the total number of issues traded. The signal happens when BOTH ratios are above 2.2%. Currently there are approximately 3,150 issues traded on the NYSE. If you do the maths, that means that the 2.2% ratio is reached at 70 - which is where I placed the blue horizontal lines on the lower panels. If both the green and red graphs are above their blue lines, a signal is possible.
An Omen signal also requires that the number of new highs be less than twice the number of new lows. You'll need to look at the values on the right side of the chart and do the mental math to see if that is true. On the chart above, you can see that 83 is less than 2 times 76 so the requirement was met in this case. The Omen also needs the McClellan Oscillator to be negative (thus the inclusion of $NYMO on the chart) and that the 10-week moving average of the NYSE be rising (something you'll need to confirm with a different, weekly chart).
Note: Hindenburg Omen aficionados prefer to get their Highs and Lows data from the Wall Street Journal in order to declare an official signal.
There are several indicators based on the theories of market breadth, but few have been regarded in the same light as the Hindenburg omen because of its ability to predict a potential stock market crash. Many indicators and strategies have been invented for the purpose of trying to spot a major correction before it happens, but no indicator can predict these crashes with complete certainty - not even the Hindenburg omen.
From historical data, the probability of a move greater than 5% to the downside after a confirmed Hindenburg Omen was 77%, and usually takes place within the next forty days. The probability of a panic sellout was 41% and the probability of a major stock market crash was 24%.
Though the Omen does not have a 100% success rate, every NYSE crash since 1985 has been preceded by a Hindenburg Omen. Of the previous 25 confirmed signals only two (8%) have failed to predict at least mild (2.0% to 4.9%) declines.
Because of the specific and seemingly random nature of the Omen indicator criteria, the phenomenon may be simply a case of overfitting. That is, by backtesting through a large data set with many different variables, correlations can be found that do not really have predictive significance. The Omen is at best an imperfect technical indicator that is a work in progress.
However, even accepting this fact, and by using this tool, traders increase the probability of spotting a potential market crash before it occurs and, as a result, may be able to profit from the decline or protect their hard earned profits from going up in smoke.
Do not crash and burn…..clear skies and smooth flying is the way to go!
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