The Hindenburg Omen is a technical stock market indicator designed to signal an increased probability of a market crash. It compares the percentage of stocks reaching new 52-week highs and lows to a specific reference percentage, suggesting a heightened crash risk.
Now, the Hindenburg Omen has flashed red again, just a month after the previous signal. This could mean that the signals are starting to form clusters, which are indicators of a potential broader stock market downturn.
What are the stock market criteria for the occurrence of Hindenburg’s Omen?
The Hindenburg Omen signals a potential stock market crash when four criteria are met: the daily number of new 52-week highs and lows must exceed a threshold (usually 2.2%), the highs cannot be more than double the lows, the market must be in an uptrend (indicated by a 10-week moving average or a 50-day rate of change), and the McClellan Oscillator (MCO) must be negative.
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Once these conditions are met, the Omen is active for 30 trading days, during which any further signals are ignored. The Omen is confirmed if the MCO remains negative during this period and invalidated if the MCO turns positive.
Traders often react by going short or exiting long positions when the MCO is negative within 30 days, a strategy that has historically helped avoid major market crashes like those in 1987 and 2008.
Analysts emphasize clusters in the stock market
Technical analyst Cam Hui argues that a single occurrence of the Hindenburg Omen isn’t particularly meaningful.
While the indicator is known for predicting the 1987 stock market crash and the 2007-2009 financial crisis, it has also generated numerous false alarms.
In a post on social-media platform X, Hui emphasized that the Hindenburg Omen “tends to be effective only when it happens in clusters.”
He noted that clusters of the Omen appeared before the market’s downturn in 2022, the 2000 decline during the onset of the COVID-19 pandemic, and other significant instances.
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