Hindenburg Omen: Definition, 4 Main Criteria, and Example (2024)

The Hindenburg omen—named after a flaming disaster— is a technical indicator designed to signal the increased likelihood of a stock market crash. It compares the percentage of new 52-week highs and new 52-week lows in stock prices to a preset reference percentage (typically 2.2%) to predict the increasing likelihood of a market crash. The indicator is said to be suitable for about 30 days out, though it's been a false alarm more often than not in the past decade.

Named after Germany's Hindenburg airship that crashed in May 1937, the indicator was conceived and promoted byJames R. Miekka in 2010. Miekka developed the indicator from historical data, with the irony that Miekka's indicator would have worked for reading the past but the omen itself wouldn't be a good reader of the market conditions after it was invented. Below, we discuss why.

Understanding the Hindenburg Omen

Given the inherent upward bias built into most stock markets, any abnormal occurrence usually leads to a flight-to-safety response from investors. This facet of investor psychology is arguably the single most relevant factor that leads to steep market declines or crashes.

The Hindenburg omen looks for a statistical deviation from the premise that under normal conditions, some stocks either make new 52-week highs or new 52-week lows. It's abnormal when both happen at the same time.

According to the Hindenburg omen, that's a harbinger of impending danger for a stock market. The signal typically occurs during an uptrend, when new highs are expected and new lows are rare, suggesting that the market is becoming nervous and indecisive, traits that often lead to a bear market.

However, changes in recent years could mean there's good reason the indicator, developed using historical data, has been a false alarm more often than not since the omen's creation in 2010. It could be that the far-more-widespread use of exchange-traded funds (ETFs) over the past couple of decades, post-financial crisis reforms, and other changes have made the omen less predictive. This has led some traders to adjust some of the omen's criteria in the hopes of making it more so.

Main Criteria for a Hindenburg Omen Signal

Four criteria must be met to signal a Hindenburg omen:

• The daily number of new 52-week highs and 52-week lows in a stock market index exceeds a threshold amount (typically set at 2.2%).
• The 52-week highs can't be more than twice the 52-week lows.
• The stock market index is still in an uptrend. A 10-week moving average or the 50-day rate of change indicator is used for this.
• The McClellan oscillator (MCO), a measure of the shift in market sentiment, is negative.

Once these conditions are met, the Hindenburg omen is considered active for 30 trading days, and any additional signals during that period should be ignored. The Hindenburg omen is confirmed if the MCO is negative during the 30-day period and rejected if the MCO turns positive.

Traders using the indicator find it relevant for about 30 days. They will take short or exit long positions should the indicator be confirmed. Those paying attention to this indicator might have escaped the 1987 market crash and the 2008 financial crisis.

Of course, since the omen's success rate is "spotty," they would have jumped unnecessarily other times. Traders might use the indicator with other technical analyses to confirm a sell or take-profit signal. For example, traders might look for a breakdown from crucial support levels before going short or taking profit on a long position.

Is the Hindenburg Omen Still Relevant?

The Hindenburg omen's effectiveness as a market crash predictor has been questioned since its appearance. While working backward, one can find many moments when it would have been predictive in past crises, it just so happens that in 2010, the market was in the midst of many changes that perhaps have meant it's been less effective since. Let's review these potential factors in the changes of the applicability of this technical indicator:

1. Market developments and ETFs: The widespread use of ETFs has impacted the indicator's effectiveness by influencing market breadth. Some analysts have adjusted the criteria, such as increasing the percentage of NYSE stocks required to reach new 52-week highs and lows.
2. Algorithmic and high-frequency trading: These strategies have changed market behavior, creating rapid movements that may not align with historical patterns used by traditional technical indicators.
3. Changing market sentiment and volatility: Modern markets are influenced by various factors that have been in flux in recent decades, including global economic conditions, geopolitical events, and central bank policies, which have been aimed at undercutting the ability of specific market dynamics to create crashes. As such, the omen could be picking up signs that cause reactions from other actors in the market to ameliorate these conditions.

This suggests that using indicators developed from different market scenarios may not be predictive once changes occur—a potent lesson when using any indicator:

Examples of the Hindenburg Omen

The following chart shows an example of the Hindenburg omen in an S&P 500 SPDR (SPY) chart in 2019.

In this example, the shaded area marks when Hindenburg omen conditions were met. The S&P 500 moved sharply lower on high volume just one month after the indicator, which suggested that traders should have braced for a bear market. Traders could have exited their long positions following the Hindenburg omen and avoided the market decline.

Below is another example from June 2024:

The image above represents an index of the Hindenburg omen. Here are the criteria that were met:

• Trigger 1: The NYSE Composite Index must be higher than 50 days ago.
• Trigger 2: Many stocks must make new 52-week highs and lows on the same day, indicating market indecision.
• Trigger 3: The McClellan oscillator must be negative, indicating a shift from positive to negative breadth.

When the three triggers occur, the Hindenburg Omen Index goes to three.

An initial sell signal occurred in early May 2024. So, for the next four weeks in June, traders would look for additional signals to confirm that it's time to sell, like patterns observed in market downturns in 2021 and 2020.

Along with keeping the Hindenburg Omen Index on a watch list, traders can also monitor the 50-day rate of change on the NYSE Composite Index, continued expansion of new highs and new lows, and a positive to negative shift in the McClellan oscillator.

Indeed, historically, market tops often occur in the summer, suggesting a potential top in June 2024—should the second signal be confirmed. Traders and investors must remain vigilant and consider technical and fundamental factors when the Hindenburg omen appears.

The Bottom Line

The Hindenburg omen is an indicator that predicts potential market downturns. It's triggered when there is simultaneously a significant number of new highs and new lows in stock prices on the NYSE, where the market index is on an upward trend, and there's a downturn in the McClellan oscillator. This complex set of conditions makes the omen relatively rare and its predictive success limited, as it often requires further confirmation to improve its reliability.