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What is the McClellan Oscillator?
The McClellan Oscillator is a market breadth indicator that is based on the difference between the number of advancing and declining issues on a stock exchange, such as the New York Stock Exchange (NYSE) or NASDAQ. The indicator is compared to stock market indexes related to the exchange.
The indicator is used to show strong shifts in sentiment in the indexes, called breadth thrusts. It also helps in analyzing the strength of an index trend via divergence or confirmation.
- The McClellan Oscillator formula can be applied to any stock exchange or group of stocks.
- A reading above zero helps confirm a rise in the index, while readings below zero confirm a decline in the index.
- When the index is rising but the oscillator is falling, that warns that the index could start declining too. When the index is falling and the oscillator is rising, that indicates the index could start rising soon. This is called divergence.
- A significant change, such as moving 100 points or more, from a negative reading to a positive reading is called a breadth thrust. It may indicate a strong reversal from downtrend to uptrend is underway on the stock exchange.
The Formula for the McClennan Oscillator is
There are two formulas for the McClennan oscillator. The original formula, and one that adjusts for changes in the number of stocks listed on the stock exchange. The adjusted formula allows for a better comparison of values over longer periods of time.
How to Calculate the McClellan Oscillator
- To get the calculation started, track Advances — Declines on a stock exchange for 19 and 39 days. Calculate a simple average for these (not EMA).
- Use these simple values as the Prior Day EMA values in the 19- and 39-day EMA formulas.
- Calculate the 19- and 39-day EMAs.
- Calculate the McClellan Oscillator value.
- Now that the value has been calculated, on the next calculation use this value for the Prior Day EMA. Start calculating EMAs for the formula instead of simple averages.
- If using the adjusted formula, the steps are the same, except use ANA instead of using Advances — Declines.
What Does the McClellan Oscillator Tell You?
The McClellan Oscillator is an indicator based on market breadth which technical analysts can use in conjunction with other technical tools to determine the overall health of the stock market and assess the strength of its current trend.
Since the indicator is based on all the stocks in an exchange, it is compared to the price movements of indexes that reflect that exchange, or compared to major indexes such as the S&P 500.
Positive and negative values indicate whether more stocks, on average, are advancing or declining. The indicator is positive when the 19-day EMA is above the 39-day EMA, and negative when the 19-day EMA is below the 39-day EMA.
A positive and rising indicator suggests that stocks on the exchange are being accumulated. A negative and falling indicator signals that stocks are being sold. Typically such action confirms the current trend in the index.
Crossovers from positive to negative, or vice versa, may signal the trend has changed in the index or exchange being tracked. When the indicator makes a large move, typically of 100 points or more, from negative to positive territory, that is called a breadth thrust. It means a large number of stocks moved up after a bearish move. Since the stock market tends to rise over time, this a positive signal and may indicate that a bottom in the index is in and prices are heading higher overall.
When index prices and the indicator are moving in different directions, then the current index trend may lack strength. Bullish divergence occurs when the oscillator is rising while the index is falling. This indicates the index could head higher soon since more stocks are starting to advance.
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Bearish divergence is when the index is rising and the indicator is falling. This means fewer stocks are keeping the advance going and prices may start to head lower.
The Difference Between the McClellan Oscillator and McClellan Summation Index?
The McClellan Oscillator was developed by Sherman and Marian McClellan who also developed the McClellan Summation Index. The McClellan Summation Index adds the current day’s McClellan Oscillator to the previous day’s McClellan Summation Index. In other words, the Summation Index is a cumulative measure, whereas the oscillator is not. While the oscillator may be more useful for analyzing shorter-term trends, the Summation Index is more applicable to broader and longer-term price trends.
Limitations of Using the McClellan Oscillator
The indicator tends to produce lots of signals. Breadth thursts, divergence, and crossovers all occur with some frequency, but not all these signals will result in the price/index moving in the expected direction. The indicator is prone to producing false signals and therefore should be used in conjunction with price action analysis and other technical indicators.
The indicator can also be quite choppy, moving between positive and negative territory rapidly. Such action indicates a choppy market, but this isn’t evident until the indicator has made this whipsaw move a few times.
Study how the indicator acts over extended periods of time and in different market conditions before relying on the indicator for trading purposes.
Table of Contents
Developed by Sherman and Marian McClellan, the McClellan Oscillator is a breadth indicator derived from Net Advances, which is the number of advancing issues less the number of declining issues. Subtracting the 39-day exponential moving average of Net Advances from the 19-day exponential moving average of Net Advances forms the oscillator. As the formula reveals, the McClellan Oscillator is a momentum indicator that works similar to MACD. McClellan Oscillator signals can be generated with breadth thrusts, centerline crossovers and divergences.
The McClellan Oscillator at StockCharts.com is ratio-adjusted to take into account the changing totals in issues traded on the NYSE and Nasdaq. Instead of using Net Advances, StockCharts.com calculates Net Advances as a percentage of advances plus declines. The result is then multiplied by 1000 to obtain whole numbers and eliminate decimals. This ratio adjustment makes it possible to compare McClellan Oscillator levels over a period of time. The NYSE traded just over 2000 stocks in 1990 and 1991. The total surged throughout the 90s and exceeded 3000 in 1995. Between 1998 and 2020, the NYSE traded between 3000 and 3600 stocks on a daily basis. Ratio-adjusted net advances (RANA) normalizes the indicator by showing net advances as a percentage of advances plus declines, allowing it to be compared across timeframes.
As the table below shows, Net Advances ranged from +2293 to -1806 in July 2020. Ratio-adjusted net advances (RANA) ranged from +753 to -595. Remember, the initial ratios were multiplied by 1000 to eliminate the decimals. This means that +753 equals +75.3% Net Advances and -595 equals -59.5% Net Advances. Exponential moving averages were then created from ratio-adjusted net advances (RANA) and the McClellan Oscillator is simply the 19-day EMA less the 39-day EMA.
Calculation Note: The 19-day EMA and 39-day EMA in the chart above are based on Net Advances divided by total issues ($NYAD:$NYTOT). This ratio was not multiplied by 1000 and left in its original decimal format.
Think of the McClellan Oscillator as the MACD for the AD Line, which is a cumulative measure of Net Advances. Just as MACD puts momentum into the price plot of a stock, the McClellan Oscillator puts momentum into the AD Line. The McClellan Oscillator is positive when the 19-day EMA (shorter moving average) is above the 39-day (longer moving average) EMA. This signals that advances are gaining the upper hand. Conversely, the indicator is negative when the 19-day EMA is below the 39-day EMA. This signals that declining issues are dominating. Signals typical for MACD apply to the McClellan Oscillator. First, the McClellan Oscillator generally favors the bulls when positive and the bears when negative. Second, chartists can look for bullish and bearish divergences to anticipate reversals. Third, chartists can look for breadth thrusts to signal the start of an extended move.
Positive vs. Negative
Even though the McClellan Oscillator can be quite volatile, it can also remain positive or negative for extended periods during a strong uptrend or downtrend. Because the NYSE McClellan Oscillator ($NYMO) is based on NYSE stocks, the following example uses the NY Composite as the base index for comparison. On the chart below, the McClellan Oscillator moved into positive territory in late November (2008) and remained positive for around six weeks. This string of positive values corresponded with an uptrend in the NY Composite. The advance ended when the McClellan Oscillator turned negative during the second week of January. There were two small blips into positive territory and then an extended period of negative values in February (four weeks). In reality, these small blips were quite weak because neither exceeded +50 and neither lasted more than two days. Selling pressure intensified in mid-February as the McClellan Oscillator moved below its January lows.
The next chart shows the Nasdaq McClellan Oscillator ($NAMO) with the Nasdaq in the lower window. There are four distinct periods on this chart: two indecisive, one positive and one negative. In the first period, the McClellan Oscillator was clearly positive from the second week of February until the fourth week of March. Notice how it surged above +50 in late February and stayed positive into late March. In the second period, the indicator turned indecisive from the fourth week of March until the second week of May. There were several crosses above/below the zero line. Notice that the indicator did not exceed +30 on the upside or -30 on the downside. There was not much conviction either way. The third period starts with a decisive move below the prior lows as the McClellan Oscillator plunges below -100. This strong selling pressure signaled the start of an extended decline and the oscillator remained largely negative until mid-June. The chart ends with the fourth period, which is another period of indecision as the oscillator fluctuated above/below zero without much conviction.
A breadth thrust occurs when the McClellan Oscillator surges from deep negative readings to strong positive readings. Typically, the indicator will move from below -50 and exceed +50 for a +100 point thrust. A breadth thrust signals a surge in bullish breadth that can lead to an extended advance. Not all breadth thrusts foreshadow extended advances, but most important lows are marked by a sharp surge in breadth. A bullish breadth thrust is enhanced when preceded by a bullish divergence.
The chart below shows the Nasdaq McClellan Oscillator during the March 2009 bottom. Notice how the McClellan Oscillator formed a bullish divergence and then surged more than 150 points (-80 to +80). This surge reflected strong buying pressure that marked an important low. Think of it as a rocket on lift off. A strong surge is needed to solidify a low and escape the gravity of selling pressure.
Also, notice that the Nasdaq continued higher as the McClellan Oscillator formed an extended bearish divergence from late March until early May. Lower highs after a breadth surge are normal. One cannot expect the oscillator to remain exceptionally strong (above +50) and continue forging higher highs after such a breadth surge. It is sufficient for the McClellan Oscillator to simply remain positive to keep the bulls going.
The next chart shows the McClellan Oscillator foreshadowing a bottom in February. The McClellan Oscillator hit its low in late January, but the NY Composite moved to a new low in early February. With the McClellan Oscillator forming a higher low, a bullish divergence formed ahead of the breadth thrust. The bullish divergence warned of a possible trend reversal, which was confirmed by the breadth thrust from -70 to +50 (+120). The McClellan Oscillator peaked in early March and formed a bearish divergence, but the NY Composite continued higher into mid-April.
Bullish and bearish divergences in the McClellan Oscillator can foreshadow reversals in the underlying index. However, chartists should not look too hard for such divergences. There will be many divergences and most will not result in reversals or extended moves.
The key, as always, is to separate robust divergences from weak divergences. First, a divergence should be confirmed with a strong supporting move. A bullish divergence is confirmed with a strong move into positive territory. A bearish divergence is confirmed with a strong move into negative territory. Second, divergences should be sharp. The difference between the reaction highs or lows should be noticeable, not negligible.
The chart below shows the Nasdaq McClellan Oscillator with a sharp bearish divergence in October 2007. Even though the Nasdaq moved to a new high in October 2007, the McClellan Oscillator formed a sharply lower high that was barely positive. The subsequent move into negative territory in early November showed a significant increase in selling pressure.
There are also some other signals and non-signals worth reviewing on this chart. Even though the McClellan Oscillator surged from positive to negative territory in November-December, the positive surge did not exceed +50. In other words, it was not strong enough to qualify as a bullish breadth thrust. There was a bullish breadth thrust in January-February, but this thrust was not preceded by a bullish divergence. The oscillator subsequently formed lower highs in February and then broke down in March. Also, notice that the Nasdaq did not move higher in February to confirm the breadth thrust.
The McClellan Oscillator measures the momentum of the AD Line or Net Advances. As a momentum oscillator, it is prone to the pitfalls of normal momentum oscillators, such as MACD. Bearish and bullish divergences can produce some great signals, but these signals are certainly not fail-proof. The same is true for breadth thrusts and crosses into negative or positive territory. Like MACD, the McClellan Oscillator is a rather volatile indicator that produces many potential signals. Signals should be confirmed or refuted with other technical indicators and chart analysis. Chartists can also study past behavior to get a better handle on future behavior.
SharpCharts users can plot the ratio-adjusted McClellan Oscillator for the NYSE McClellan Oscillator ($NYMO) or the Nasdaq McClellan Oscillator ($NAMO). Users can also plot the un-adjusted McClellan Oscillator for the NYSE ($NYMOT) and Nasdaq ($NAMOT). The unadjusted McClellan Oscillators are based on Net Advances (as opposed to ratio-adjusted Net Advances).
These indicators can be shown in the main chart window or in indicator windows above or below the main window. The example below shows the NYSE McClellan Oscillator as a histogram plot in the main chart window with the NY Composite in the indicator window below. Just select “Histogram” as a chart “Type.” Click here for a live example.
Chartists can also add horizontal lines as an overlay to help identify key levels. Two levels can be added by separating the values with a comma in the parameters box (50,-50). The underlying index can be added in an indicator window below the main window. Select “price” and then enter the symbol in the “Parameters” box.
The McClellan Oscillator & Summation Index
Every day that stocks are traded, financial publications list the number of stocks that closed higher (advances) and that closed lower (declines). The difference between these numbers is called the daily breadth. The running cumulative total of daily breadth is known as the Daily Advance-Decline Line. It is important because it shows great correlation to the movements of the stock market, and because it gives us another way to quantify the movements of the market other than looking at the price levels of indices.
The second chart shows an example of the daily breadth. Each tick mark represents one day’s reading of advances minus declines. In order to better identify the trend that is taking place in the daily breadth, we smooth the data by using a special type of calculation known as an exponential moving average (EMA). It works by weighting the most recent data more heavily, and older data progressively less. The amount of weighting given to the more recent data is known as the smoothing constant.
We use two different EMAs: one with a 10% smoothing constant, and one with a 5% smoothing constant. These are known as the 10% Trend and 5% Trend for brevity according to the tradition established by the late P.N. Haurlan who first used EMAs for tracking the stock market in the 1960s. The numerical difference between these two EMAs is the value of the McClellan Oscillator.
The McClellan Oscillator offers many types of structures for interpretation, but there are two main ones. First, when the Oscillator is positive, it generally portrays money coming into the market; conversely, when it is negative, it reflects money leaving the market. Second, when the Oscillator reaches extreme readings, it can reflect an overbought or oversold condition.
While these two characteristics are very important, they merely scratch the surface of what interpreting the Oscillator can reveal about the stock market. Many more important structures are outlined in the book Patterns For Profit by Sherman and Marian McClellan, available from McClellan Financial Publications.
By adding up all of the daily values of the McClellan Oscillator, one can produce an indicator known as the McClellan Summation Index. It is the basis for intermediate and long term interpretation of the stock market’s direction and power. When properly calculated and calibrated, it is neutral at the +1000 level.
The +1000 neutral level was instituted back in the days of manual calculations, because some users had trouble with keeping track of the minus signs when subtracting a negative number from another negative number. Because the McClellan Summation Index in the 1960s generally moved between 0 and +2000, Sherman and Marian shifted the neutral level to 1000 to make a negative reading a rare and thus important indication. The expansion in the number of issues traded on the NYSE has caused these overbought and oversold thresholds to also expand. One of the techniques that we have implemented to deal with this is to use a “Ratio adjusted Summation Index (RASI)” calculation,
As with the Oscillator, the Summation Index offers many different pieces of information in order to interpret the market’s action. One should not just pay attention to the numerical value of the McClellan Summation Index, because understanding its chart structure offers so much more insight.
Current values for the McClellan Oscillator and McClellan Summation Index are available daily on our Data page. In every issue of The McClellan Market Report, we discuss the current market action and the interpretive significance of the McClellan Oscillator and Summation Index. See our Market Reports section to learn more about our publications.
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