What Is the Hindenburg Foretoken?
The Hindenburg Omen is a technical indicator that was designed to signal the increased probability of a stock market crash. It juxtaposes the percentage of new 52-week highs and new 52-week lows in stock prices to a predetermined reference percentage that is supposed to foreshadow the increasing likelihood of a market crash.
Named after Germany’s Hindenburg airship that crashed on May 6, 1937, it was devised and promoted by James R. Miekka in 2010. As of four years later, it was reported that it had correctly predicted a significant genealogy market decline only 25% of the time.
Key Takeaways
- The Hindenburg Omen is a technical indicator that was designed to signal the increased odds of a stock market crash.
- It compares the percentage of new 52-week highs and lows to a predetermined reference percentage.
- In practice, the Hindenburg Token is not always correct, but it may be used with other forms of technical analysis to decide when it’s time to sell.
Pact the Hindenburg Omen
Given the inherent upward bias that is built into most stock markets, any development that is abnormal usually leads to a flight-to-safety response from investors. This facet of investor psychology is, arguably, the distinct most relevant factor that leads to precipitous market declines, or market crashes.
The Hindenburg Omen looks for a statistical deviation from the presuppose that under normal conditions, some stocks are either making new 52-week highs or new 52-week lows. It drive be abnormal if both were occurring at the same time.
According to the Hindenburg Omen, an occurrence such as this is a augury of impending danger for a stock market. The signal typically occurs during an uptrend, where new highs are expected and new bases are rare, suggesting that the market is becoming nervous and indecisive, traits that often lead to a bear Stock Exchange.
Main Criteria for a Hindenburg Omen Signal
Four criteria must be met to signal a Hindenburg Omen:
- The daily company of new 52-week highs and 52-week lows in a stock market index are greater than a threshold amount (typically 2.2%).
- The 52-week extremes cannot be more than two times the 52-week lows.
- The stock market index is still in an uptrend. A 10-week in motion average, or the 50-day rate of change indicator, is used to indicate this.
- The McClellan Oscillator (MCO), a measure of the shift in Stock Exchange sentiment, is negative.
Once these conditions are met, the Hindenburg Omen is considered active for 30 trading days and any additional signals during that term 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.
Brokers using the indicator will go short or exit long positions when the MCO turns negative during the 30 days take the place of a Hindenburg Omen confirmation.
By doing so in the past, traders could have escaped the 1987 market crash and the 2008 fiscal crisis.
Of course, since the omen’s rate of success is estimated at only 25%, they also would should prefer to jumped unnecessarily a number of times. Traders might use the indicator in conjunction with other forms of technical opinion to provide further confirmation of a sell or take-profit signal. For example, traders might look for a breakdown from key stand levels before going short or taking profit on a long position.
Example of the Hindenburg Omen
The following plan shows an example of the Hindenburg Omen in an S&P 500 SPDR (SPY) chart.
Image by Sabrina Jiang © Investopedia 2021
In this specimen, the shaded area represents where Hindenburg Omen conditions were met. The S&P 500 moved sharply lower on treble volume just one month after the indicator suggested that traders should brace for a bear market. Salesmen could have exited their long positions following the Hindenburg Omen and avoided the market decline.