Overview:
The McClellan Oscillator is a market breadth indicator that is based on the smoothed difference between the number of advancing and declining issues on the New York Stock Exchange.
The McClellan Oscillator was developed by Sherman and Marian McClellan. Extensive coverage of the oscillator is provided in their book Patterns for Profit.
Interpretation:
Indicators that use advancing and declining issues to determine the amount of participation in the movement of the stock market are called "breadth" indicators. A healthy bull market is accompanied by a large number of stocks making moderate upward advances in price. A weakening bull market is characterized by a small number of stocks making large advances in price, giving the false appearance that all is well. This type of divergence often signals an end to the bull market. A similar interpretation applies to market bottoms, where the market index continues to decline while fewer stocks are declining.
The McClellan Oscillator is one of the most popular breadth indicators (another popular breadth indicator is the Advance/Decline Line). Buy signals are typically generated when the McClellan Oscillator falls into the oversold area of -70 to -100 and then turns up. Sell signals are generated when the oscillator rises into the overbought area of +70 to +100 and then turns down.
If the oscillator goes beyond these areas (i.e., rises above +100 or falls below -100), it is a sign of an extremely overbought or oversold condition. These extreme readings are usually a sign of a continuation of the current trend.
For example, if the oscillator falls to -90 and turns up, a buy signal is generated. However, if the oscillator falls below -100, the market will probably trend lower during the next two or three weeks. You should postpone buying until the oscillator makes a series of rising bottoms or the market regains strength.
Overview:
The McClellan Summation Index is a market breath indicator based on the McClellan Oscillator.
The McClellan Summation Index was developed by Sherman and Marian McClellan. Extensive coverage of the index is provided in their book Patterns for Profit.
Interpretation:
The McClellan Summation Index is a long-term version of the McClellan Oscillator. Its interpretation is similar to that of the McClellan Oscillator except that it is more suited to major trend reversals.
As explained in the Calculation section, there are two methods to calculate the Summation Index. The two calculation methods create indicators with identical appearances, but their numeric values differ. These interpretational comments refer to the "suggested" calculation method explained in the Calculation section.
McClellan suggests the following rules for use with the Summation Index:
- Look for major bottoms when the Summation Index falls below -1,300.
- Look for major tops to occur when a divergence (page 29) with the market occurs above a Summation Index level of +1,600.
