What is the Hindenburg Omen ?

The stock markets are apparently at a critical juncture again. A few weeks back we had the 'Death Cross' forming in the DOW and S&P, that was supposed to herald a crash, that so far hasn't materialized. Now all the talk is about the Hindenburg Omen, named after the Hindenburg airship that crashed in 1937 in a sudden explosion.

The Hindenburg Omen is supposed to presage a stock market crash and there are five factors that decide whether a Hindenburg Omen is being formed or not.

The five factors are :-

1. The daily number of new 52 Week Highs on the NYSE and the daily number of new 52 Week Lows must be greater than 2.2% of total NYSE issues traded that day.
2.The smaller of these numbers must be equal to or greater than 69 (68.772 is 2.2% of 3126). Not a hard and fast rule, more like a checksum. This condition is a function of the 2.2% of the total issues.
3.The NYSE 10 Week moving average must be rising.
4.The McClellan Oscillator must be negative on that same day.
5.The new 52 Week Highs cannot be more than 2 x new 52 Week Lows. This is an essential condition.

The website Zero Hedge says the Hindenburg Omen is the "most feared technical pattern in all of chartism" (if you are bullish). ..... it is a technical analysis that attempts to predict a forthcoming stock market crash." It is however not a guarantee of a crash, the five criteria required the Hindenburg Omen need to reoccur within 36 days for confirmation.

The statistics are neverthless interesting to say the least - "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. Today, we just had another (unconfirmed) Hindenburg Omen. They then add "It is time to batten down the hatches - something big is coming. "

All 5 conditions have been satisfied. This also happened back in June 2008 and Barron's said at the time  "there's a 25% probability of a full-blown stock-market crash in the next 120 days." It appears also that the Hindenburg Omen has been present just before all the market sell offs of the last 25 years.

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 said Albert Edwards, strategist at Societe Generale SA, the Hindenburg Omen may suggest that “a savage equity downturn is imminent..... Equities are tottering on the edge as increasingly recessionary data becomes apparent. It would not take much to tip them over that edge.”

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.

So the indicators seem to be indicative of a downturn, and the 5 criteria indicate that we have indeed seen the Hindenburg Omen, but the 5% or 10% fall the experts mention does not to my mind represent a crash.  But the next few weeks might prove interesting as we see if the Hindenburg Omen lives up to its billing, or even exceeds it, or not.

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