What it is:
The Hindenburg Omen is a technical indictor that attempts to predict market crashes.
How it works (Example):
The Hindenburg Omen is triggered when three complex conditions are met:
1) The number of new daily 52-week highs and lows on the NYSE is more than 2.2% of all securities traded that day. However, new 52-week highs cannot be more than twice the number of new 52-week lows. This condition is mandatory.
2) The 10-week moving average of the NYSE is rising.
3) The McClellan Oscillator, an overbought/oversold indicator, is negative.
Why it Matters:
The Hindenburg Omen is tracked by analysts to anticipate a steep decline in the stock market several weeks in advance. However, since 1987 it has accurately anticipated market turmoil only 25% of the time.
Technical analysts are trying to perfect the Hindenburg Omen's predictive powers by assigning additional criteria that much be met to confirm that the market is headed toward a decline. As with any technical analysis, it is important to note that because many people believe in technical trading rules, at the very least the rules can become self-fulfilling, making them important to know for the individual investor.
The Hindenburg Omen is named after the disasterous crash of the German Zeppelin Hindenburg in 1937. 36 passengers were killed and the negative media onslaught crushed the budding airship travel industry permanently.
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