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McClellan Oscillator and Summation Index

The McClellan Oscillator is a market breadth indicator that can indicate overbought and oversold conditions in the market. It is used primarily for short term and intermediate term trading. The McClellan Summation Index is used for intermediate to long term trading.

The cornerstone of the McClellan Oscillator is the market breadth, defined by the number of advancing issues (number of stocks that closed higher) less the number of declining issues (number of stocks that closed lower). When this number is declining in a bull market, it signals a weakening in the bull market. When this number is advancing in a bear market, it indicates a strengthening of the market that might end the bear market soon.

The running cumulative total of daily breadth is called the Advance-Decline Line.

The McClellan Oscillator is calculated by subtracting the number of declining issues from the number of advancing issues, and then subtracting a 5% (39 day) exponential moving average of this value from a 10% (19 day) exponential moving average of this value. An exponential moving average weights recent data more heavily and data is weighted less and less as it gets older, thus smoothing the data history.

The formula for the 5% component is:
I5 = (AD-I5P)*.05 + I5P

The formula for the 10% component is:
I10 = (AD-I10P)*.10 + I10P

The formula for the McClellan Oscillator is:
MO = I10 - I5

The formula for the McClellan Summation Index is:
MS = MO + MSP

An alternate formula for the Summation Index which prevents drift and yields a more consistent relationship with the zero line is:
MS = 19*I5 - 9*I10

Where:
AD = 1000*(A-D)/(A+D)
A = Number of stocks that closed higher
D = Number of stocks that closed lower
I5 = Today's 5% index
I5P = Prior day's 5% index
I10 = Today's 10% index
I10P = Prior day's 10% index
MO = Today's McClellan Oscillator Reading
MS = Today's McClellan Summation Index
MSP = Prior day's McClellan Summation Index

In a bear market, when the oscillator gets below -100, it indicates an extremely oversold condition, and may indicate the bear market is ending (although it can stay oversold for several weeks). Many traders will buy if the oscillator gets oversold (below -70) and then turns up (reverses direction), where short sellers will lock in their profits and long traders might take new positions contrary to the current trend. Similarly, a series of declining peaks indicates weakness.

In a bull market, when the oscillator gets larger than +100, it indicates an extremely overbought condition, and may indicate the bull market is ending (although the market can stay overbought for several weeks). Many traders will sell if the oscillator gets overbought (above +70) and turns down (reverses direction), to lock in their profits or to take positions contrary to the market. Similarly, a series of rising troughs indicates strength.

When the oscillator crosses the zero line and goes from negative to positive, it is a bullish sign. It indicates that money is coming into the market. The shorter moving average (19 day) has moved above the longer moving average (39 day), indicating that advancing issues are becoming dominant.

When the oscillator goes from positive to negative, it is a bearish sign. It indicates that money is going out of the market. The shorter moving average (19 day) has moved below the longer moving average (39 day), indicating that declining issues are becoming dominant.

When there is a minor change in the McClellan Oscillator (4 or less), a change of 1% or more can be expected in the market in the next two days. About 75% of the time, the index will move in the same direction as the minor change. If another minor change happens the following day, the 1% change could be delayed a day.

The McClellan Summation Index is used for intermediate to long term trading. From the formula above, you can see that it is a summation of the McClellan Oscillator.

When the Summation Index is moving up, it indicates money is coming into the market. When the Summation Index is moving down, it indicates money is going out of the market.

When the Summation Index is negative and getting more negative, it indicates a downtrend is underway. However, when it gets very negative, it is time to look for market bottoms. Major bottoms have occurred when the Summation Index went lower than -1300. A strong rise from such a level can signal the beginning of a bull market. A major bull market is underway if the Summation Index advances more than 3600 points to a level above +1900.

When the Summation Index is positive and getting more positive, it indicates an uptrend is underway. However, when it gets very positive, it is time to look for market tops. Major tops have occurred when the Summation Index passed +1600. A strong drop from such a level can signal a bear market is beginning. A major bear market is underway if the Summation Index declines more than 3600 points to a level below -1900.

In 1969, Sherman and Marion McClellan developed the McClellan Oscillator and McClellan Summation Index. Tom McClellan is their son and has carried on their work. James Miekka developed an alternate formula for the Summation Index which prevents drift and yields a more consistent relationship with the zero line (shown above).




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