Education / Indicators / McClellan oscillator

A technical analysis indicator, which uses NYSE market breadth to judge the strength of a market move in the near term. Calculated by subtracting a 39-day exponential moving average of the difference between advancing issues and declining issues on the NYSE from a 19-day exponential moving average of the same difference. 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.

Indicators that use advancing and declining issues to determine the amount of participation in the movement of the stock market are called "breadth" indicators. A healthy bull market is accompanied by a large number of stocks making moderate upward advances in price. A weakening bull market is characterized by a small number of stocks making large advances in price, giving the false appearance that all is well. This type of divergence often signals an end to the bull market. A similar interpretation applies to market bottoms, where the market index continues to decline while fewer stocks are declining.

The McClellan Oscillator is one of the most popular breadth indicators. Buy signals are typically generated when the McClellan Oscillator falls into the oversold area of -70 to -100 and then turns up. Sell signals are generated when the oscillator rises into the overbought area of +70 to +100 and then turns down. If the oscillator goes beyond these areas (i.e., rises above +100 or falls below -100), it is a sign of an extremely overbought or oversold condition. These extreme readings are usually a sign of a continuation of the current trend.

Calculation

The McClellan Oscillator is the difference between 10% (approximately 19-day) and 5% (approximately 39-day) exponential moving averages of advancing minus declining issues.