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Posted on 8 April 2011 | 8,250 views

Hindenburg Omen Signal Predicts Market Crash

The Hindenburg Omen is a technical indicator named after the airship that crashed so spectacularly in 1937. According to some, the Hindenburg Omen is the technical pattern that is the most feared by bullish chartists — it’s a technical signal that often predicts an upcoming stock market crash. It is, however, not a guarantee of a crash.

The statistics are nevertheless compelling – “Looking back at 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 last time we saw a Hindenburg Omen was during the lows of 2009.

These criteria are calculated daily using Wall Street Journal figures for consistency. (Other exchanges may be used as well.) Some have been calibrated by Miekka to reduce statistical noise and make the indicator a more reliable predictor of a future decline.

  1. The daily number of NYSE new 52 week highs and the daily number of new 52 week lows are both greater than or equal to 2.8 percent (typically, 84) of the sum of NYSE issues that advance or decline that day (typically, around 3000). An older version of the indicator used a threshold of 2.5 percent of total issues traded (approximately 80 of 3200 in today’s market).
  2. The NYSE index is greater in value than it was 50 trading days ago. Originally, this was expressed as a rising 10 week moving average, but the new rule is more relevant to the daily data used to look at new highs and lows.
  3. The McClellan Oscillator is negative on the same day.
  4. New 52 week highs cannot be more than twice the new 52 week lows (though new 52 week lows may be more than double new highs).

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.

For the Hindenburg Omen to be effective according to the experts, it must appear at least twice, and up to five times within a 36 day period. The subsequent market collapse needs to take place within a 120 day time frame.

According to NASDAQ.com the Hindenburg Omen occurred for the second consecutive day yesterday, which confirms the signal that the market is likely to have at least a 10% correction in the next few months.

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