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Hindenburg Omen |
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The famous German airship known as the Hindenburg became one of history's most prevalent images of disaster when it burst into flames while making a landing in 1937. This airship now shares its name with a technical tool that was invented to help traders predict/avoid a potential stock market crash.
Thanks to a crafty mathematician named Jim Miekka, and his friend Kennedy Gammage, this technical indicator, known as the Hindenburg Omen, can be used to predict sharp corrections and can help traders profit from the decline or avoid realizing major losses before others ever see it coming.
The Technicalities
The Hindenburg Omen is the alignment of several technical factors that measure the underlying condition of the stock market.
The main goal of the indicator is to determine if a higher overall probability exists such that a stock market crash has a higher likelihood than normal.
The Hindenburg Omen can also assess to a limited extent if a probability of a severe decline is on average higher than normal.
The general rationale behind the indicator is that "under normal conditions" either-
 A substantial number of stocks set new annual highs
A substantial number of stocks set new annual lows
(Conditions 1 & 2 cannot both take place at the same time, it is either one or the other—but not both)
However, this indicator mainly tracks new lows and downside risk. This is a part of its strength and part of its weakness.
A healthy market requires some degree of internal uniformity, whether the direction of that uniformity is up or down. Market breadth theories suggest that when markets are trending upward, or creating new highs, the number of companies forming 52-week highs should exceed the number that are experiencing 52-week lows. Conversely, when the market is trending downward, or creating new lows, the number of companies trading at the lowest end of their 52-week ranges should drastically outnumber the companies creating new highs.
Does it Work?
Every trader longs to be able to predict a stock market crash in order to profit from the decline or to protect some of their hard-earned profit. The Hindenburg Omen is nearly as good as it gets when it comes to being able to identify these crashes before they happen.
According to Robert McHugh, CEO of Main Line Investors, "The omen has appeared before all of the stock market crashes, or panic events, of the past 21 years", speaking about 1985 to 2006. Having a signal that can generate sharp market declines is appealing to all active traders, but this signal is not as common as most traders would hope. According to McHugh, the Omen only created a signal on 160 separate days, or 3.2% of the approximate 5,000 days that he studied.
Although this indicator does not provide frequent signals, it should be considered worthy to incorporate it into a trading strategy because it could allow traders to dodge a major crash.
Further Accuracy
Technicians are always looking to hone the accuracy of a given signal and the Hindenburg Omen is no exception. Traders have added other confirming conditions, besides the ones listed above, in an attempt to reduce the number of false signals that are generated.
Most traders will require that the number of new highs not exceed twice the number of new lows when the signal is generated. By monitoring the advancing and declining issues, traders can ensure that the demand for a broad range of securities is not slanted in the bulls' favor. A lack of securities trading near the upper end of their 52-ranges is a representation of the deficient demand in the market and can be used to reconfirm the prediction of a move downward.
The final piece of confirmation that traders will watch for is other transaction signals occurring in close proximity to the first. A cluster of Hindenburg Omen signals, generally deemed to mean two or more signals generated within a 36-day period, is often interpreted to be much more significant than if only one signal appears by itself.
Friday, 13th August 2010
For anyone affected by paraskevidekatriaphobia, or the fear of what might happen during a Friday that falls on the 13th day of the month, Friday, August 13, 2010, was bad enough. However, those suffering from this malady who happened to be stock analysts or investors in equities received a double psychic whammy. This is because on this day, all of the criteria for the dreaded Hindenburg Omen were met. |
