A Look at The Hindenburg Omen
A technical pattern dubbed “The Hindenburg Omen” was triggered last week. It supposedly has a decent record of predicting steep market declines.
The 5 criteria of the Hindenburg Omen:
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.
Robert McHugh at Safe Haven provides some insight into the “Omen:”
So what is a Hindenburg Omen? It is the alignment of several technical factors that measure the underlying condition of the stock market – specifically the NYSE – such that the probability that a stock market crash occurs is higher than normal, and the probability of a severe decline is quite high. This Omen has appeared before all of the stock market crashes, or panic events, of the past 21 years. All of them. No panic sell-off occurred over the past 21 years without the presence of a Hindenburg Omen. The way Peter Eliades put it in a recent Daily Update, September 21, 2005 (Peter is well worth the read, believe me), “The rationale behind the indicator is that, under normal conditions, either a substantial number of stocks establish new annual highs or a large number set new lows – but not both.” When both new highs and new lows are large, “it indicates the market is undergoing a period of extreme divergence — many stocks establishing new highs and many setting new lows as well. Such divergence is not usually conducive to future rising prices. A healthy market requires some semblance of internal uniformity, and it doesn’t matter what direction that uniformity takes. Many new highs and very few lows is obviously bullish, but so is a great many new lows accompanied by few or no new highs. This is the condition that leads to important market bottoms.”
Charts Gone Wild provides some nice charts on Hindenburg Omen occurences since 1990.
Source: Safe Haven