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The Hindenburg Omen
By AKHILESH GANTI Updated September 22, 2021
Fact checked by VIKKI VELASQUEZ
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.1
KEY TAKEAWAYS
Understanding the Hindenburg Omen
Given the inherent upward bias that is built into 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, some stocks are either making new 52-week highs or new 52-week lows. It would be abnormal if both were occurring at the same time.
According to the Hindenburg Omen, an occurrence such as this is 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
Four criteria must be met to signal a Hindenburg Omen:
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.1
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.2
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.
Example of the Hindenburg Omen
The following chart shows an example of the Hindenburg Omen in an S&P 500 SPDR (SPY) chart.
Image by Sabrina Jiang © Investopedia 2021
In this example, the shaded area represents where 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.
ARTICLE SOURCES
Related Terms
52-Week High/Low Definition
The 52-week high/low is the highest and lowest price at which a security, such as a stock, has traded during the time period that equates to one year.more
Trend Trading Definition
Trend trading is a style of trading that attempts to capture gains when the price of an asset is moving in a sustained direction called a trend. more
Rickshaw Man Definition
The rickshaw man is a long candlestick with a doji body, centered between the high and low, that indicates indecision in the market. more
Unique Three River Definition and Example
The unique three river is a candlestick pattern composed of three specific candles, and it may lead to a bullish reversal or a bearish continuation. more
Sentiment Indicator Definition and Example
A sentiment indicator is a graphical or numerical indicator designed to show how a group feels about the market or economy. more
Trend Definition and Trading Tactics
A trend is the general price direction of a market or asset. Determining the trend direction is important for maximizing the potential success of a trade.more
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