What is the Hindenburg Omen?
Let me explain the Hindenburg Omen to you—it's a technical indicator I use to gauge the increased probability of a stock market crash. Named after the flaming disaster of the German airship in 1937, this omen compares the percentage of new 52-week highs and new 52-week lows in stock prices against a preset reference, usually 2.2%, to flag rising crash risks. It's typically relevant for about 30 days, but in the past decade, it's triggered false alarms more often than successes.
James R. Miekka developed and promoted this indicator in 2010, basing it on historical data. Ironically, while it backtested well for past events, it hasn't been as reliable for future market conditions since its invention. I'll dive into why that is below.
Key Takeaways
You should know that the Hindenburg Omen aims to signal a higher chance of a stock market crash by looking at the balance of new highs and lows relative to a threshold. In practice, it's not always accurate, so I recommend using it alongside other technical analysis tools to decide when to sell.
Understanding the Hindenburg Omen
Stock markets generally have an upward bias, so any unusual activity often prompts investors to seek safety, which can trigger sharp declines or crashes. This investor psychology is key to understanding steep market drops.
The Hindenburg Omen spots a statistical anomaly: under normal conditions, stocks hit either new 52-week highs or lows, but not both simultaneously. When they do, it's a sign of trouble ahead. This signal usually appears during an uptrend, where highs are common but lows are not, indicating market nervousness and indecision that can lead to a bear market.
However, recent market changes might explain why the indicator, built on old data, has been mostly false alarms since 2010. The rise of exchange-traded funds (ETFs), post-crisis reforms, and other shifts could have reduced its predictive power. Some traders tweak the criteria to try making it more effective.
Main Criteria for a Hindenburg Omen Signal
- The daily number of new 52-week highs and lows on a stock market index must exceed a threshold, typically 2.2%.
- The 52-week highs cannot be more than twice the 52-week lows.
- The market index must be in an uptrend, confirmed by a 10-week moving average or 50-day rate of change.
- The McClellan oscillator, which measures market sentiment shifts, must be negative.
How the Signal Works
Once these criteria are met, the Hindenburg Omen activates for 30 trading days, and you should ignore extra signals in that window. It's confirmed if the McClellan oscillator stays negative and rejected if it turns positive. Traders like me consider it active for those 30 days and might short or exit longs if confirmed. It could have helped avoid the 1987 crash and 2008 crisis, but its spotty record means unnecessary exits other times. I suggest pairing it with checks like breakdowns from support levels for better confirmation.
Is the Hindenburg Omen Still Relevant?
I've questioned the Hindenburg Omen's value as a crash predictor since it emerged. It backtests well for historical crises, but market changes since 2010 have likely made it less effective. Factors include the widespread use of ETFs affecting market breadth, with some analysts raising the required percentage of NYSE stocks for highs and lows. Algorithmic and high-frequency trading have altered behaviors, creating movements that don't match old patterns. Plus, shifting sentiment from global events, geopolitics, and central bank policies might prevent crashes that the omen flags.
This teaches you that indicators from past market eras may not predict well after changes occur— a reminder for any technical tool.
Examples of the Hindenburg Omen
Take the 2019 example on an S&P 500 SPDR (SPY) chart: the shaded area showed when conditions were met, and the S&P 500 dropped sharply on high volume a month later. You could have exited longs and sidestepped the decline.
Another from June 2024 involves an index of the omen. Triggers included the NYSE Composite higher than 50 days prior, many stocks hitting new highs and lows indicating indecision, and a negative McClellan oscillator. When all three hit, the index goes to three. An initial sell signal in early May 2024 meant watching for confirmations in June, like patterns from 2020-2021 downturns. Monitor the 50-day rate of change, expanding highs and lows, and oscillator shifts. Historically, tops often happen in summer, so a June 2024 top was possible if confirmed. Stay vigilant with technical and fundamental factors when this appears.
Similar Signals and Complementary Indicators
You might also look at signals like the Titanic syndrome or death cross to predict downturns; they assess market health differently but aim to spot corrections or bear markets.
Pair the Hindenburg Omen with tools like the relative strength index or moving averages for a fuller picture of conditions around its signals.
Why Does It Have Low Success?
The omen has low success due to its complex, rare criteria that don't always lead to declines. Market changes since development might make it outdated.
The Bottom Line
In summary, the Hindenburg Omen predicts downturns when significant new highs and lows occur simultaneously on the NYSE during an uptrend with a negative McClellan oscillator. Its rarity and need for confirmation limit reliability, so use it carefully with other tools.
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