The Hindenburg Omen isn’t a hit
NAMES for technical indicators don’t get much more dramatic than the Hindenburg Omen – simultaneously referencing the German airship tragedy of 1937 in which 36 people lost their lives and bringing to mind haunting visions of the psychotic Damien from the infamous horror film, the Omen.
Chris Beauchamp, market analyst at IG Markets, believes a lot of the excitement derives from the name. The facts are somewhat more sober and technical. Beauchamp explains: “Essentially the Hindenburg Omen involves trying to assess the health of the market using new highs and lows and the volume traded – usually when the daily number of New York Stock Exchange listed firms that hit 52-week highs and the daily number of firms that hit 52-week lows both exceed 2.2 per cent.”
Like all indicators, people are fond of pointing out when it was right, but less keen on pointing out when it got it wrong, says Beauchamp. He notes that “a Wall Street Journal study claimed that every major crash since 1985 was preceded by a Hindenburg Omen”, but adds that it’s important to remember that “correlation is not causation”.
Also, Beauchamp explains that the Omen was designed in an era before exchange-traded funds and high frequency trading, so its relevance needs to be treated with caution – some have begun to suggest that you need multiple triggers for the Omen to become a reality.
Whether or not the Omen is reliable, traders “should concentrate on their own analysis and technical indicators rather than waiting for the big one,” says David Morrison, senior market strategist at GFT. Morrison is instead focusing on the chief fundamental issues affecting financial markets and using technical indicators and studies such as Fibonacci retracements, Andrews’s Pitchfork and moving averages to help him pick entry and exit levels. However, he notes that if he hears that the criteria for the Hindenburg Omen have been met, he won’t rush to buy stocks – “just in case”.
FUNDAMENTAL FACTS
David James Norman – author of CFDs: The Definitive Guide to Contracts for Difference – says “you don’t need a technical analysis principle like the Hindenburg Omen to tell you the market is in trouble.” He think the following facts will do:
■ Slowing business/economic activity (ISM and Chinese growth figures).
■ High government and consumer indebtedness.
■ The ineffectiveness of quantitative easing.
■ Rock bottom interest rates with nowhere else to go but up.
■ A weakening US dollar.
■ A political standoff in the Eurozone.
■ Mixed US earnings.
■ The traditional sell-off in May.
Norman says “there’s no magic here.” He thinks “traders who need the Hindenburg Omen to show them a bearish sign really can’t read the fundamentals properly.”
The Hindenburg disaster has, to date, hindered the market for passenger-carrying airships. However, stock market crashes have yet to deter investors. Of course, crashes need not necessarily worry traders who are free to seek profit equally from a falling and rising market.
It would be foolish to dismiss the Hindenburg Omen out of hand – if fear sets in from volatility, which is after all what the technical indicator is measuring, it can become a self-fulfilling prophecy. As Brenda Kelly, senior market strategist at CMC Markets says “as with most technical analysis signals, there will always need to be a certain amount of belief and participation from the broader investor segments to see a move play out.” But this remains an indicator better suited to writers of sensational headlines than disciplined traders. You have been warned.