Hindenburg Omen: Why equity investors should be very afraid

Fri Aug 13, 2010 3:44pm BST

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Perhaps the clue is in today's date, Friday 13, but equity investors should be very afraid if the reappearance of a US technical indicator believed to herald an imminent market crash is to be believed.

The 'Hindenburg Omen' is the ominously-titled list of five separate indicators linked to the New York Stock Exchange which when they occur at the same time, have historically warned of an impending crash.

Named after the tragic events of 1937 when the zeppelin airship Hindenburg dramatically exploded into flames in New Jersey, influential US market blog Zero Hedge reported over night that the five technical indicators appeared to have occurred last Tuesday.

In fact Zero Hedge describes the Hindenburg Omen as: 'Easily the most feared technical pattern in all of chartism (for the bullishly inclined). Those who know what it is, tend to have an atavistic reaction to its mere mention.'

What is it? The Hindenburg Omen describes when the daily number of New York Stock Exchangelisted 52 week highs and the daily number of 52 week lows both exceed 2.2% of all the issues traded.

On 10 August, trading in new highs and new lows both exceeded that level.

So what you might say. But the Hindenburg Omen has apparently been present just prior to all of the market corrections or sell offs of the last 25 years.

Apparently the last time the phenomenon occurred was twice in June 2008, and once a month later. We all know what happened to the stock market that Autumn.

The Hindenburg Omen factors in full are apparently correctly covered on Wikipedia:

1. 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. The smaller of these numbers is greater than or equal to 69 (68.772 is 2.2% of 3126)

3. That the NYSE 10-Week moving average is rising.

4. That the 'McClellan Oscillator' is negative on that same day. (This is a market breadth indicator used by NYSE analysts to evaluate how much money is flowing in or out of the market on any given 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).

Factor 5 is an absolute necessity in all cases.

Experts say that for the Hindenburg Omen to be effective, it has to appear at least twice, and up to five times within a 36 day period, and that the the subsequent market sell off has to happen within a120 day time frame.

According to US market blogger Marko's Take, the technical indicators were almost there on 10 July. The daily number of 52 week highs was met, but the daily number of stocks recording 52 week lows fell just short of the 2.2% level.

Don't say you have not been warned.

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