Capital Market : Hindenburg Omen

Alex K. Mathews, Research Head

For some days now, we have been hearing of the “Hindenburg Omen” which is an indication of a stock market crash in the coming days. The US markets are showing some signs of weakness due to rising unemployment, low economic growth and mounting debt balances, and according to various economists, US is going to experience a double dip. Let us take a look at what the Hindenburg Omen actually is.

Hindenburg Omen is a technical analysis pattern which is widely believed to give early indication of a stock market crash. It is named after the Hindenburg disaster of May 6, 1937 during which the German sky ship Hindenburg was destroyed. The indicator was invented by a blind mathematician named Mr. Jim Miekka. Recent studies reveal an impending stock market crash in US.

Criteria

• The daily number of new 52 week highs and daily new 52 week lows should be greater than or equal to 2.2% of the sum of scrips that advance or decline that day.

• The index should be greater in value than it was 50 trading days ago.

• The McClellan Oscillator should be negative on the same day.

• The New 52 week highs cannot be more than twice the new 52 week lows when new 52 week lows may be more than double the new highs.

• The traditional definition requires all these conditions to be satisfied on the same day and the generated signal is valid for 30 days.

Recent Occurrences

• On August 12, 2010, a signal was created with 92 and 81 new 52 week highs and lows respectively.

• On August 20, 2010, the omen was confirmed with 83 new 52 week highs and 95 new 52 week lows on NYSE. The McClellan Oscillator was -106.46 and the 10 week NYSE was rising.

• On August 24, 2010, the new 52 week lows were 166 and the new 52 week highs were 87.

• Another signal was generated on August 25, 2010 with 150 new 52 week lows and 90 new 52 week highs meeting all the conditions.

At present all the 5 situations have been satisfied. Dow may witness a fall of around 3000 points within 120 days, according to the various researchers on Hindenburg Omen. There are instances of false indications also. According to the fundamentalists, the overall accuracy has been a dismal 25 percent. Let us now wait and see whether the current indications reflect the accuracy of the indicator or not.