By Rudi Filapek-Vandyck, Editor FNArena

As far as technical indicators go, the Hindenburg Omen sounds very scary and not only because it carries the name of a famous air travel accident that instantaneously killed off the attraction of traveling by zeppelin between Europe and the American continent. That famous accident which most people will remember by that iconic black and white footage of a burning zeppelin in the air occurred in 1937.

The last time the technical signal reared its head was in August of 2010, even though its most popular point of reference is late 2007. Back in 2007 the world was about to descend into Dante's Inferno, though few saw the descent coming. The Hindenburg Omen was there to warn those investors who paid attention. This explains why its mentioning carries a lot more anxiety than most other indicators.

FNArena reported on the Hindenburg Omen in August 2010 when, according to reports at that time, the signal had been confirmed. Today, some technicians say it wasn't genuinely confirmed at that time. We'll leave that in the middle, observing there was one short, sharp sell-down, a quick recovery and then equities meandered lower leading into 2011 when more weakness was yet to announce itself.

In 2007, however, there was no two ways about it: shortly after the Hindenberg Omen issued its warning ("confirmed signal") Satan himself opened the gates of hell and invited everyone in, whether they liked it or not.

The Hindenburg Omen is essentially a combination of technical signals, which is why it is only on the radar of a minority of technical traders. Combined, these technical signals are believed to forecast an increased likelihood of a stock market crash. The technical inputs are the 10 Week Simple Moving Average, New 52 week highs on the NYSE, New 52 Week lows on the NYSE, and the McClellan Oscillator.

Whenever all moving indicators fall in line with requirements, we have a "warning" and the requirement is that this happens at least for a second time inside a 36 days period. Only then do we have a "confirmed" signal. The official forecast following such confirmation is that a serious decline is in the making within the next 40 days.

Here's the more elaborate odds-adjusted scenario following a confirmed warning from the Hindenburg Omen:

- 30% stock market crash (>15%)
- 41% panic sell off will occur (10-15%)
- 56% >8% sell off
- 78% >5% sell off

Note that the highest chance is attributed to a minor sell-down of less than 5% only. Such a minor correction is what happened in 2010.

Here's how it works: if, on the same day, the 10 Week Moving Average is rising, new Highs are greater than 2.2% of total issues traded, new Lows are greater than 2.2% of total issues traded, and the McClellan Oscillator is negative, then a first warning is given, labelled the Hindenburg Signal. A second such signal within a 36-day period is considered a Hindenburg Omen, otherwise labeled a "confirmed signal". If correct we should now see a serious decline within the next 40 days

How serious is this "decline" going to be? See table with odds above.

The omen has received quite some attention in the US media and even Dennis Gartman mentioned it in his recent daily newsletters. In Australia, we haven't spotted any reports other than one update this week by RBS Warrants.


Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

FN Arena is building the future of financial news reporting at www.fnarena.com . Our daily news reports can be trialed at no cost and with no obligations. Simply sign up and get a feel for what we are trying to achieve.

Subscribers and trialists should read our terms and conditions, available on the website.

All material published by FN Arena is the copyright of the publisher, unless otherwise stated. Reproduction in whole or in part is not permitted without written permission of the publisher.