Dreaded "Hindenburg Omen" Registered Yesterday
The ominous "Hindenburg Omen" registered yesterday, August 12, on the
New York Stock Exchange. It was also nearly triggered the day before, on August 11. So what exactly is this dreaded technical indicator, and what does it mean? The Hindenburg Omen is named after the Hindenburg disaster of May 6, 1937, during which the German zeppelin Hindenburg was destroyed.
The Hindenburg Omen occurs when a number of technical indicators align on the NYSE. It has been a fairly accurate predictor of an imminent stock market crash. However, and this is important, a confirmed Hindenburg Omen requires a second (or more) trigger within the next 36 days. In other words, another alignment of the Hindenburg Omen in the near future will give positive confirmation of a likely imminent steep market decline.
The criteria for the technical indicator are as follows:
1. 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.
2. That the smaller of these numbers is greater than or equal to 69 (68.772 is 2.2% of 3126). This is not a rule but more like a checksum. This condition is a function of the 2.2% of the total issues.
3. That the NYSE 10 Week moving average is rising.
4. That the McClellan Oscillator is negative on that same day.
5. That new 52 Week Highs cannot be more than twice the new 52
Week Lows (however it is fine for new 52 Week Lows to be more than double new 52 Week Highs). This condition is absolutely mandatory.
The indicator denotes unhealthy internals in the marketplace, with a large number of stocks making both new highs and new lows. It suggests a lack of internal uniformity in the stock market and, therefore, a much higher than normal probability for a steep decline.
According to UBS technical analyst Michael Riesner, “It’s an interesting name but what you really have as a technical background is a classic distribution phase in the market,” Riesner said. “It’s the classic tug of war between bulls and bears that you have there.”
The indicator last occurred in October 2008, according to UBS AG, and was triggered a total of seven times in 2008 as the S&P 500 recorded its steepest annual drop since the Great Depression. The Hindenburg Omen was also reportedly triggered on June 13, June 21, and June 22, of 2007 near the top of U.S. equity markets.
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 probability of a panic sellout was 41% and the
probability of a major stock market crash was 24%.
A confirmed Hindenburg Omen has occurred prior to every major stock market crash since 1985. In other words, if yesterday's alignment is confirmed by another Hindenburg Omen in the next 36 days, it may be time to head for the hills - if you already haven't.
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