McClellan Oscillator is a popular market breadth indicator developed by Sherman and Marian McClellan in 1969. It is also used by traders to make sense of short-term events in the stock market.
The McClellan Oscillator is computed by subtracting a 39-day Expnential Moving Average (EMA) from a 19-day EMA.
Oscillator = (19 Day EMA of Advances less Declines) – (39 Day EMA of Advances less Declines)
It is plotted against the New York Stock Exchange or Nasdaq to monitor the rate of selling and buying conditions in the market.
When the indicator is POSITIVE, it means money is flowing to the market. When the indicator is NEGATIVE, it means money is flowing out of the market.
The prices of stock move up and down every single day. It is a waging battle between the bulls and bears. The volume and velocity of stocks determine the investor’s attitude towards the market and the prices. Breadth is the number of stocks that move with the up and down of the market. When most of the stocks are moving up, the market is being BULLISH. When most of the stocks are down, the market is being BEARISH.
Swing traders attempt to gain from a stock within one to four days. They hold their positions longer than a single day. They are concerned with short-term price momentum. Using the McClellan Oscillator, a BUY signal is when the indicator gets into the -50 to -100 range and then goes up. A SELL signal is when the indicator is between +50 and +100 and then goes down.
Momentum traders are concerned about stocks that move significantly in one direction and in high volumes. The duration of their positions vary from minutes to days according to how the stock moves and changes direction. They jump aboard the stocks with highest volume to gain a profit.
In this case, a BUY signal is when the oscillator is above 0. While a SELL signal is when the oscillator is below 0.
For long-term investors, the McClellan Summation Index is more useful. It is the composite of all the McClellan Oscillators.
The McClellan Summation Index exposes bearish and bullish divergence. For example, if market is exhibiting rising peaks and troughs, the McClellan might show declining peaks and troughs. This is a BEARISH DIVERGENCE.
On the other hand, if the market is declining, the oscillator might show rising peaks and troughs. This is a BULLISH DIVERGENCE.
Usually, we rely on business pages and business channels to tell us whether the market is doing well or otherwise. It gives us a general perception of the health of the market. However, rising stock prices might be driven by just a small number of very popular stocks. So, the next time the news tells you the market is rising, check out your McClellan Oscillator to make true sense of the market and to gain a good profit.
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