McCLELLAN OSCILLATOR &
McCLELLAN SUMMATION INDEX
GENERAL
The McClellan Oscillator and Summation Index are breadth-based indicators,
which means they are derived from the daily advances minus declines on the New
York Stock Exchange. These indicators were invented in the 1960's by
Short to mid-term leading indicators, based on a market Index (NYSE,
etc), showing overbought and oversold markets and providing valuable timing tools.
McCLELLAN
OSCILLATOR
Similar to MACD, the McClellan Oscillator is a momentum indicator that is applied to
the advance/decline statistics. It is a
market breadth indicator that is based on the smoothed difference between the
number of advancing and declining issues of the daily advances minus declines
of an Exchange with the weighted 20 and 40 day moving averages
- Indicates
overbought markets in the area of +50
and above (until +125 according to the volume of trade) and oversold in the area of -50 and below (until -125 according to
the volume of trade)
- 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 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 .
- Overbought
and oversold indications when the oscillator crosses the +50
(+125) and -50 (-125) levels .
- 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 +50 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 -50 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 is a popular market
breadth indicator that is ultimately derived from the number of advancing and
declining stocks in a given market. It is derived from the McClellan Oscillator
by tracking its daily accumulation or "summation". This provides a
longer-term view of the McClellan concept. Many people regard it as an
excellent indicator of the overall "health" of the market and the market's
current trend.
The McClellan
Summation index generally oscillates between 0 and 2000 although it can move
outside of this range during extreme or unusual market conditions.
Historically, major market bottoms occur after the index falls below -1000.
The Summation Index is simply a longer range version
of the McClellan Oscillator. Whereas the McClellan Oscillator is used for short
to intermediate trading purposes, the Summation Index provides a longer range
view of market breadth and is used to spot major market turning points.
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McCLELLAN OSCILLATOR and SUMMATION INDEX FORMULAS
The McClellan Oscillator
is based on the daily NYSE advances minus declines. Calculate a 40 day
exponential moving average (0.05 exponent) average and a 20 day exponential
moving average (0.1 exponent) average. After calculating the two averages each
day, subtract the 40 day EMA from the 20 day EMA to get the McClellan
Oscillator value. Then add the daily McClellan Oscillator value to the prior
day's Summation Index (Summation Index) to get today's Summation Index.
The following are
the exact formulas (the "*" is the spreadsheet version of a
multiplication sign):
5% Index:
((Today's Adv minus Decl - Prior Day's 5% Index) *
0.05) + Prior Day's 5% Index = Today's 5% Index
10% Index:
((Today's Adv minus Decl - Prior Day's 10% Index) *
0.10) + Prior Day's 10% Index = Today's 10% Index
(Note: The first
time you begin to calculate an exponential average, you must calculate a simple
moving average.)
McClellan
Oscillator:
Today's 10% Index - Today's 5% Index = Today's McClellan Oscillator
McClellan
Summation Index (Old Method):
Yesterday's Summation Index + Today's McClellan Oscillator = Today's Summation
Index
McClellan
Summation Index (New Method):
Mathematician James Miekka developed a new formula
for calculating the daily Summation Index that prevents drift and forces it to
maintain a consistent relationship with the Zero Line. Rather than adding the
current McClellan Oscillator value to the prior day's Summation Index (the
traditional method, which causes the undesired drift), the Miekka
formula derives the Summation value directly from the daily 5% and 10% index
readings. This not only stabilizes the Summation Index, it also allows you to
calculate the Summation Index for any day without knowing what the prior day's
reading was. Also important, the Miekka method insures
that independent calculations will always be within a few points of one another
-- differences are often caused by rounding and variances in advance-decline
data.
The formula is:
Summation Index = 1000 - (9 * 10% Index) + (19 * 5% Index)
The McClellans have determined that the +1000 level is the
neutral value for the Summation Index, which is the reason for the
"1000" in the formula.
The McClellans have given their blessing to the Miekka formula, and, as far as I know, use it themselves.
RATIO ADJUSTED McCLELLAN OSCILLATOR CALCULATION
The increasing number of issues traded on the NYSE over the years has caused
the McClellan Oscillator and other breadth indicators to reach greater high and
low extremes over the years, but these new record highs and lows did not
accurately reflect the true internal condition of the market.
For example, let's
compare the 1968-70 and 1998 Bear Markets, representing declines of about 36%
and 20% respectively. Even though the 1968-70 decline
was much more severe, the McClellan Summation Index readings (traditional
calculation) were -2252 for 1970 and -3526 for 1998, giving the false
impression that the 1998 Bear Market was worse than 1968-70. Using a
ratio-adjusted calculation the Summation Index reading for the 1970 low was
-2402 compared to the 1998 low of -1444, clearly reflecting the proportional
relationships of the two bear markets, and making it possible to make an
accurate historical comparison.
This is an
important change. For McClellan Oscillator aficionados, there are two basic
differences in the calculations. First, the basic input for the ratio-adjusted
version is no longer the daily advances minus declines. Rather you (1) subtract
declines from advances, (2) divide the result by the total of advances plus
declines, and (3) multiply that result by 1000. (Multiplying by 1000 is simply
cosmetic and lets us work with whole numbers instead of decimals.) The rest of
the calculations for the Oscillator are the same. The second difference is that
zero (0) is now considered neutral for the Summation Index, so you no longer
begin with 1000 in
your Summation Index calculation.
This change in the
basic breadth input described above will also affect the STO (Swenlin Trading Oscillator), the ITBM (Intermediate-Term
Breadth Momentum) Oscillator, and the 1% EMA of Advances-Declines -- they will
become ratio-adjusted indicators.