What Is the McClellan Oscillator?
The McClellan Oscillator is a comprehensive market breadth indicator that measures the difference between advancing and declining issues on a stock exchange, like the NYSE or NASDAQ. This key tool is invaluable for identifying strong shifts in market sentiment, known as breadth thrusts, and for analyzing the strength of an index trend through divergence or confirmation.
Key Takeaways
- The McClellan Oscillator can be applied across various stock exchanges or groups of stocks.
- A positive reading helps confirm an uptrend in the index, while a negative reading confirms a downturn.
- Divergence between index movement and the oscillator may signal upcoming trend changes.
- A significant change from negative to positive readings (100 points or more) indicates a breadth thrust and may signal an impending trend reversal.
The Formula for the McClellan Oscillator
There are two primary formulas for the McClellan Oscillator: the original formula and an adjusted version that accounts for changes in listings on a stock exchange.
McClellan Oscillator = (19-day EMA of Advances - Declines) - (39-day EMA of Advances - Declines)
19-day EMA = (Current Day Advances - Declines) * 0.10 + Prior Day EMA
39-day EMA = (Current Day Advances - Declines) * 0.05 + Prior Day EMA
Adj. McClellan Oscillator = (19-day EMA of ANA) - (39-day EMA of ANA)
Adj. Net Advances (ANA) = (Advances - Declines) / (Advances + Declines)
19-day EMA = (Current Day ANA - Prior Day EMA) * 0.10 + Prior Day EMA
39-day EMA = (Current Day ANA - Prior Day EMA) * 0.05 + Prior Day EMA
Where:
- EMA = Exponential moving average
- Advances = Number of stocks trading above their previous day’s close
- Declines = Number of stocks trading below their previous day’s close
How to Calculate the McClellan Oscillator
- Track the Advances - Declines for 19 and 39 days on a stock exchange to get started.
- Calculate simple average (not EMA) values for these periods to serve as prior day EMAs.
- Use these as initial values in the 19- and 39-day EMA formulas.
- Compute the 19- and 39-day EMAs.
- Derive the McClellan Oscillator values.
- For each subsequent day, use the calculated EMA values for the Prior Day EMA inputs.
Using the adjusted formula involves the same steps but employs ANA values instead of Advances - Declines.
What Does the McClellan Oscillator Tell You?
As an integral market breadth indicator, the McClellan Oscillator aids technical analysts in assessing overall market trends and fortifying analysis with other technical tools. Positive shifts in the oscillator imply market accumulation, while negative movements suggest market distribution.
This indicator is crucial for confirming index trends, spotting reversal signals, and identifying divergence patterns that may hint at future index movement. Large upward shifts, termed breadth thrusts, often denote market bottoms and potential bullish trends.
Understanding Divergence
- Bullish Divergence: Occurs when the index is falling, but the oscillator is rising, potentially predicting a forthcoming increase in the index.
- Bearish Divergence: Happens when the index is rising but the oscillator is falling, indicating a possible decline.
McClellan Oscillator versus McClellan Summation Index
Developed by Sherman and Marian McClellan, the McClellan Summation Index is a cumulative measure that adds the current day’s oscillator value to the prior day’s summation value, contrasting with the shorter-term utility of the non-cumulative McClellan Oscillator.
Limitations of Using the McClellan Oscillator
Despite its utility, the McClellan Oscillator can produce numerous signals, not all of which lead to the anticipated movements in price or index direction. The indicator may deliver false signals and should be supplemented with price action analysis and other technical indicators.
Furthermore, the oscillator’s frequent oscillation between positive and negative territory may indicate a choppy market, observable only after multiple whipsaw movements. Hence, extensive study of the indicator over varying market conditions is recommended before deploying it in trading strategies.
Related Terms: EMA, market breadth, divergence, reversal, S&P 500, false signals, choppy market.
References
- Robbins, R. (2012). Market Considerations. In Tactical Trend Trading (pp. 101-116). Apress, Berkeley, CA.
- Devcic, J. (2004). Understanding McClellan’s Oscillator & Summation Index. TECHNICAL ANALYSIS OF STOCKS AND COMMODITIES-MAGAZINE EDITION- , 22(9), 60-61.
- McClellan, S. (1989). Patterns for Profit: The McClellan Oscillator and Summation Index. Marian Publishing.
- McClellan Financial Publications. “Sherman McClellan”.
