The McClellan Oscillator was created in 1969 by Sherman and Marian McClellan. This legendary indicator has become one of the most highly regarded tools of technical analysts. The McClellan Oscillator can be used to gauge the strength of market moves as well as to identify important divergences in the market. Time and time again it has proved its trustworthiness. For a further review on this indicator visit http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:introduction_to_mark
The McClellan Oscillator is based on advance/decline statistics. Every day the market calculates net advances (number of stocks in the index that have increased) and net declines (number of stocks in the index that have decreased). The “oscillator” is calculated by taking the net advances – net declines at the close of every trading day. The 39 day as well as 19 day exponential moving average is then calculated from this data. By taking the 39 day exponential average and subtracting the 19 day exponential moving average the oscillator is calculated.
Interpretation of Oscillator
By analyzing the trends and characteristics of this oscillator traders are able to pick out certain underlying developments in the market. The McClellan Oscillator ranges from +100 meaning the index is overbought to -100 meaning the market is oversold. Depending on the trader’s strategy, different buy and sell signals can be derived from the oscillator. A buy signal may be given as the oscillator starts to advance from oversold conditions. On the other hand, a sell signal may be given as the oscillator declines from overbought conditions. Generally a reading above 0 signals investor sentiment is positive, a reading below 0 signals negative investor sentiment.
Divergence & Trends
Many technical analysts will monitor the McClellan Oscillator for trends. For example, if the oscillator were to exhibit a series of higher highs the analyst may come to the conclusion that market sentiment is improving warranting a higher probability of higher prices in the future. Conversely a series of lower lows could signal decreasing investor sentiment and warn of a high degree of lower prices to come in the future.
The oscillator can also be used to spot divergences in the stock market. The oscillator should move in the general direction of the index that it is tracking. If a divergence occurs (prices keep moving higher as the oscillator moves lower) the analyst can determine that a current market move may not be significant and a high probability of retracement is exhibited. By using the McClellan Oscillator, analysts will become more informed of market sentiment.
 |
