McClellan Oscillator
& McClellan
Summation Index
A
short to mid-term leading indicator, based on
a market Index (NYSE, etc), showing overbought
and oversold markets and providing a valuable
timing tool.
Overview
Comprised
of the daily advances minus declines of an Exchange,
usually the New York Stock Exchange, with the
weighted 20 and 40 day moving averages
- Indicates overbought
markets above +125 and oversold below -125
- Used as an important
timing tool based on bullish and bearish signals.
The McClellan
Oscillator is calculated by subtracting a 39-day
exponential moving average of the difference between
the advancing issues and the declining issues
from a 19-day exponential moving average of the
difference between the advancing issues and the
number of the declining issues in the Exchange.
Interpretation
The McClellan
Oscillator is based on the movements of an Exchange,
usually the New York Stock Exchange, not on any
one particular stock. It is a short to mid-term
"market breadth" indicator designed to determine
the strength of a market trend. Market breadth
is a measure of the percentage of stocks participating
in a particular market move; if two-thirds of
the stocks listed on an exchange move in the same
direction during a trading session analysts say
there was significant breadth.
The Oscillator
produces three general types of signals:
- Divergence
between the Index line and the indicator line
2.
- Overbought
and oversold indications when the oscillator
crosses the +125 and -125 levels 3.
Zero line
crossovers as the oscillator moves between
positive and negative territory.
Signals
The McClellan
Oscillator offers the following specific signals
and alerts:
Divergence
The oscillator
leads the index; so if it fails to confirm a new
index high or low, the index may be forming a
top or bottom. The example chart shows divergence
between the index and the oscillator, with the
oscillator indicating weakness. The Index subsequently
plunged leaving behind a market top. Divergence
can provide a warning, and should be combined
with the other signals to produce definite entry
and exit points.
Oversold/Overbought
indications
- An overbought
market is indicated when the oscillator enters
territory above the +100 to +125 range. A
bearish signal is provided when the
oscillator forms a peak above +125 and then
crosses back below this level.
- An oversold market
is indicated when the oscillator enters territory
below the -100 to -125 range. A bullish
signal is provided when the oscillator
forms a bottom below -125 and then crosses
back above this level.
Zero-line
Crossovers
- Bullish signal:
upward movement through the zero line.
- Bearish signal:
downward movement through the zero line.
McClellan
Summation Index
The McClellan
Summation Index (MSI) is a cumulative total of
the McClellan Oscillator, useful for intermediate
to long term trading. Both are based on the movements
of a market Index (i.e., NYSE) rather than an
individual stock. Major tops tend to occur when
the MSI goes above +1500. Major bottoms tend to
occur when the MSI dips below -1500 (the -2000
level may provide more reliable signals - see
example below).
