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McClellan Oscillator & McClellan
Summation Index
A short to mid-term leading indicator, based on a
market Index (NYSE, etc), showing overbought and oversold markets and
providing a valuable timing tool.
Overview
Comprised of the daily advances minus declines of an
Exchange, usually the New York Stock Exchange, with the weighted 20 and
40 day moving averages
- Indicates overbought markets above +125 and oversold below -125
- 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, usually the New York Stock 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
2.
- Overbought and oversold indications when the oscillator
crosses the +125 and -125 levels 3.
- 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 +100 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 -100 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 (MSI) is a cumulative total
of the McClellan Oscillator, useful for intermediate to long term trading.
Both are based on the movements of a market Index (i.e., NYSE) rather
than an individual stock. Major tops tend to occur when the MSI goes
above +1500. Major bottoms tend to occur when the MSI dips below -1500
(the -2000 level may provide more reliable signals - see example below).
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