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The Hindenburg omen is a series of market characteristics some people believe portend a major market crash. Mathematician Jim Miekka developed the criteria, and the Hindenburg omen can be highly accurate in some cases. Financial media may report when the conditions meet the criteria and will take note of any market shifts in the wake of the announcement. This is only one among many metrics investors can use to predict market movements.
According to proponents of the Hindenburg omen, the characteristics indicate shifting consumer confidence, which can precede a meltdown in the market. The omen is named for a famous zeppelin disaster that occurred in the 1930s, when the German airship Hindenburg crashed in a fiery explosion in New Jersey. The name implies that the market can quickly go up in flames when certain conditions occur.
Statistics from the New York Stock Exchange form the basis of the criteria. All of them must occur on the same day for the Hindenburg omen to be in play. The first is that at least 2.2 of the listed stocks must be making new highs and lows, reflecting positive and negative activity. The new highs cannot be more than double those of the new lows; if 10% of stocks are making new highs and 3% are making new lows, the criteria for the Hindenburg omen are no longer met. In addition, the 10-week moving average for the market must be on the rise. Finally, the McClellan oscillator, a metric for determining overbought and oversold stocks, must be negative.
Together, these criteria suggest faltering investor confidence. Even for investors who do not take the Hindenburg omen as the final authority, it can be a warning sign. When trading activity is mixed in this way, investors may be nervous and could be prone to panic. A major market event or a big piece of political news could set the market into turmoil and create a nosedive in market values as investors jockey for position.
Once the Hindenburg omen is identified, investors will watch the market closely for the next 30 days to see if it pulls out of the pattern, breaking the criteria, or if it continues to move in dangerous ways. Investors may reposition themselves to take advantage of falls in the market, or may move investments around to get their money in safer locations, such as out of volatile stocks and into stable government securities. This can create a snowball effect, as investors panic over the Hindenburg omen and create the very market conditions they fear.