Monday, August 16, 2010

The Hindenburg Omen as a Stock Market Crash Indicator


A certain concurrence of stock market technical measures called the Hindenburg Omen has often signaled that the market is ready to crash and burn.  The full "Omen" occurs when two Hindenburg Events are recorded on the New York Stock Exchange (NYSE) within 36 days.  A Hindenburg Event is defined as follows:
  • The number of stocks achieving 52-week highs and the number achieving 52-week lows must each exceed 2.2% of the total number of companies listed on the NYSE. (The market is split with both strong bears and strong bulls.)
  •  The NYSE composite rolling average of the previous 10 weeks must be positive. 
  • The number of stocks achieving a 52-week high must not be more than twice the number achieving a 52-week low.
  •  The NYSE McClellan Oscillator (a momentum measure) must be negative.

The Hindenburg Omen has occurred prior to every major stock market crash since 1985.  There were actually 8 Hindenburg Omens in 2008 as the S&P 500 posted its biggest annual drop since the Great Depression.

The probability of a move greater than 5% to the downside after a confirmed Hindenburg Omen has been 77%. It usually takes place within 40 days of the first Hindenburg Event.  The probability of a panic sellout was 41% and the probability of a major stock market crash was 24%.

A Hindenburg Event occurred on Thursday last week, and came close to occurring the day before.

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