The Hindenburg Omen
Courtesy of Michael Eckert at EW Trends and Charts
What is it?
It is a set of conditions and rules that when met greatly increases the odds of a large sell-off, or crash of the markets. In fact no crashes in the last 22 years have happened that did not first have a confirmed signal of a Hindenburg Omen. Just because all the conditions have been met, and it becomes a confirmed Hindenburg Omen, does not guarantee a crash. But it greatly increases the chances of a severe market correction ahead. Another way to think about it is without a confirmed Hindenburg Omen in place, Bulls can sleep a little better at night knowing that most likely they will not awaken to the market down 10%. In fact, the odds of a crash based upon the history since 1985 is 27% after two or more signals were confirmed.
Under normal conditions, there can be large number of stocks setting new 52 week highs, or a large number setting 52 week lows, but not both. Things become out of balance when large numbers of stocks are setting new highs, and lows at the same time. Having one sector soaring, and another setting new lows is not good in the balance of a healthy market.
The traditional definition of a Hindenburg Omen is that the daily number of NYSE New 52 Week Highs and the Daily number of New 52 Week Lows are both so high as to have the lesser of the two be greater than 2.2 percent of total NYSE issues traded that day.
And that has been updated to include two more sets of conditions to filter out false readings:
1-The daily number of NYSE new 52 Week Highs and the daily number of new 52 Week Lows are greater than 2.2 percent of total NYSE issues traded that day.
- The smaller of these numbers is greater than 75 (this is not a rule but a function of the 2.2% of the total issues).
2-The NYSE 10 Week moving average is rising.
3-The McClellan Oscillator is negative.
4-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 mandatory.
With regards to rule one, if 75 issues are making new highs/lows, then the 2.2% requirement has been achieved.
In order to have a CONFIRMED Hindenburg Omen you must have more then one unconfirmed Hindenburg Omen signal, in less than 36 days.
Another interesting observation is that once you get two confirmed Hindenburg Omens in a 36 day period , the probability of a severe decline does not seem to increase as more Omens occur, it is possible to have multiple Omens before a crash. Multiple signals are telling us things are not getting better, that something continues to be out of balance in the markets.
McHugh’s research noted that plunges can occur as soon as the next day, or as far into the future as four months.
So where are we at now?
[Click on charts to enlarge]
This is the 10 week moving average on the NYSE composite index. Currently it is rising, and fulfills requirement #3. This is a given and will continue rising for sometime, even with a sell-off it will be slow to start turning down.
This is the McClellan Oscillator, currently it is in negative territory at -49.03, and fulfills requirement #3. This indicator needs to be check daily as it fluctuates back and forth weekly
This is the NYSE new 52 week highs, this also is a given for now, and will stay above 75 until we see some more downside. Currently reading 175 new 52 week highs after the close today, so it fills the requirement of its role in rule number 1 that new 52 week highs must be above 75.
And this is the NYSE new 52 week lows, I saved it for last because without some selling pressure, this will not fulfill criteria 1. After the close Friday, there were only 2 new 52 week lows, far below the requirement of 75+.
So to have a Hindenburg Omen confirmed, we need more new 52 week lows to be made. This will require a sell-off to start throwing the indexes out of balance. It won’t happen overnight. The McClellan Oscillator needs to be checked daily after we start seeing more 52 week lows. Rule number 4, cannot kick in until rule number 1 is satisfied.
Conclusion- Monday morning the stock market will not crash according to the Hindenburg Omen. We will need a small bleed-off to start seeing an increase in the 52 week lows. The best thing to do for now is to keep your eyes on the weaker sectors. I did do a search on CAPS stock screener, and found 84 stocks that were from 0-5% above their 52 week lows, Banks and Pharmaceuticals led the list.
As the lows start increasing, it will fill the blogs with chat about an approaching Hindenburg Omen. So you can sleep well for now. You can track it for yourself. (I will have the charts posted in my public charts at Stock charts).
I would like to give a big Kudos to Dr. Robert McHugh, he is in the forefront of the research and collection of data for the Hindenburg Omen, and his named showed up in over 90% of the articles I read in preparation of this post. McHugh’s website is the Technical Indicator Index.
