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Table of Contents

Introduction ............................................................................................... 3

The Hindenburg Omen ............................................................................. 3

The Indicator Behind The Omen .............................................................. 3

Criteria of The Hindenburg Omen ............................................................ 4

Market Crashes Correctly Predicted By The Omen ................................ 5

False Positives .......................................................................................... 6

The Man Behind the Omen ....................................................................... 6

Conclusion ................................................................................................ 6

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Introduction

In the 1937, a German airship caught fire while attempting to

dock with a tower. The entire vessel was quickly consumed by

flames and crashed to the ground – killing 36 people. The

event was one of the first disasters to be caught on film and the

accompanying news coverage made the entire event a

worldwide media sensation. To this day, the name of the vessel

– The Hindenburg – is synonymous with disaster.

The Hindenburg Omen

Named after the ill-fated German airship of 1937, The Hindenburg Omen is a feared

technical indicator that can signal an upcoming stock market crash. The theory states

that when the Omen “appears” or is active, the market is likely to crash. The omen has

appeared prior to past crashes, but it is known for generating false positives as well.

The Indicator Behind The Omen

The Hindenburg omen uses the basic premises of market breadth by studying the

number of advancing/declining issues, but gives the traditional interpretation a slight

twist to suggest that the market is setting up for a large correction.

The theory is largely based on Norman G. Fosback's High Low Logic Index (HLLI). The

value of the HLLI is the lesser of the NYSE new highs or new lows divided by the

number of NYSE issues traded, smoothed by an appropriate exponential moving

average.

The Hindenburg Crash, 1937

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This indicator gives a warning signal when more than 2.2% (as high as 2.8% according

to some) of traded issues are creating new highs while a separate 2.2%, or more, are

creating new lows. The disparity between new highs and lows suggests that the

conviction of market participants is weakening and that they are unsure of a security's

future direction.

For example, assume that 156 of the approximately 3,394 traded issues (this number

changes over time) on the NYSE reaches a new 52-week high today, while 86

experience new annual lows. Dividing the 156 new highs by 3,394 (total issues) will

yield a result of 4.6%. Dividing 86 (new lows) by 3,394 (total issues) gives us a result of

2.53%. According to the theory because both of the results are greater than 2.2%, the

criterion for the Hindenburg omen has been met and technical traders should be wary of

a potential market crash.

The pattern functions on a combination of technical factors that attempt to measure the

health of the NYSE, and by extension, the stock market as a whole. The goal of the

indicator is to signal increased probability of a stock market crash. The rationale is that

under "normal conditions" a substantial number of stocks may set either new annual

highs or new annual lows, but not both at the same time. As a healthy market

possesses a degree of uniformity, whether up or down, the simultaneous presence of

many new highs and lows may signal trouble. Theoretically, it could be applied to any

stock exchange.

Criteria of The Hindenburg Omen

The daily number of NYSE new 52-week highs and the daily number of new 52-week

lows are both greater than a threshold (2.2% to 2.8%). The NYSE index is greater in

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value than it was 50 trading days ago - 50-day Rate of Change (ROC) should be

positive.

Originally, this was expressed as a rising 10-week moving average, but the new rule is

more relevant to the daily data used to look at new highs and lows. As a rule, the

shorter the time-frame in which the conditions listed above occur, and the greater the

number of conditions observed in that time frame, the stronger the effect.

If several—but not all—of the conditions are repeatedly observed within a few weeks,

that is a stronger indicator than all of the conditions observed just once during a 30-day

period.

The Hindenburg Omen is only valid in a rising market -- as measured by the NYSE

composite rolling average over the past 10 weeks; the number of stocks at a 52-week

high must not be more than twice those stocks at a 52-week low, and the Hindenburg

set of apocalyptic conditions must occur twice in a 30-day period.

Market Crashes Correctly Predicted By The Omen

The obvious question is how often has this indicator truly predicted a crash?

The Hindenburg Omen appeared in October of 2007 – right as the S&P 500 was

making all-time highs. The market tumbled quickly -- dropping over 50% from the peak

of October 2007 to the low in March of 2009.

The omen also appeared before the crash of 1987 – so in that regard the omen

correctly predicted two of the biggest crashes in the last 30 years. However, a market

crash only follows 30% of the time when the omen appears so in that regard the omen

is less-than-perfect. The omen has also been plagued by a number of false positives.

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False Positives

In August of 2010, the Hindenburg indicator was tripped twice within a 30-day period,

arousing the curiosity of economists, traders, and investors alike. During that time, the

creator of the Hindenburg Omen – Jim Miekka – told the Wall Street Journal that he’d

exited the market in anticipation of a crash. No such crash occurred.

The Man Behind The Omen

In 1986, Jim Miekka was a physics teacher. Miekka and his brother were conducting an

experiment on a chemical product in the hopes of patenting the formula for use in the

mining industry. According to an interview with the Bangor Daily News, Miekka said he

was mixing chemicals at his family’s kitchen table in Sudbury, Massachusetts, when the

mix exploded, damaging his hands and eyes. His curiosity and analytical drive were not

dimmed by his misfortune. Among the many projects he decided to channel his

intellectual restlessness into was one that would enable him to use sound to aim a

firearm equipped with a light-sensitive scope. He eventually became an

accomplishments marksman even after losing his sight. Jim Miekka died in 2014 when

he was struck by an SUV as he walked near his home in Surry, Maine. He was 54.

Conclusion

Every trader longs for some kind of crystal ball. So it’s easy to see why the Hindenburg

Omen had so much appeal. But the reality is that no such advantage exists.

However, this doesn’t mean the omen should be completely ignored. As you’ve seen,

when the omen appears it does make sense to be on high alert.

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It also makes sense to educate yourself on how to trade stock options. Traditional buy

& hold investors can do nothing but ride out the crash and hope for a speedy recovery.

But trading options actually gives you the potential to go after profits before, during and

after a crash.

In fact, there’s a way to

potentially turn a modest

account of $5,000 into

nearly $60,000 in about

six months trading

options. This free video

reveals the exact trading

plan that makes these kinds of gains possible.

Thanks for reading.

Good Trading,

Bill Poulos

Profits Run, Inc.