The McClellan oscillator is a technical indicator of market breadth based on moving averages .
The McClellan oscillator is calculated on the forward / downward line . Based on it, it calculates two moving averages from different periods and subtracts them. Graphically:
This indicator receives such a name from its creators. Since it was in 1968 when the McClellan couple (Sherman and Marian McClellan) developed this indicator.
McClellan Oscillator Formula
The McClellan oscillator is calculated in two stages. First, the difference between the number of values going up and the number of values going down from a given index is calculated. That is, the advance / descent is calculated. Two means are calculated on said value. A short-term exponential moving average and a long-term exponential moving average.
Once the averages have been calculated, the value of the short-term average is subtracted from the value of the long-term average. The result is the value of the McClellan oscillator. The formulas for its calculation are:
AD = Number of values going up – number of values going down
McClellan Oscillator = (Exponential Moving Average of the last 19 AD values) – (Exponential Moving Average of the last 39 AD values)
The indicator can take both positive and negative values. Taking into account the indicator formula, if the short-term average (19 days) is above the long-term average (39 days), the value will be positive. Conversely, if the short-term average (19 days) is below the long-term average (39 days), the indicator value will be negative.
Interpretation of the McClellan oscillator
Knowing that this oscillator takes positive values or negative values, we will explain how they are interpreted:
- Positive values:if the indicator is above zero, the market trend should be bullish.
- Negative values: if the indicator remains at negative levels, the market trend should be downward.
Likewise, based on the above, there are three levels of utmost importance in order to correctly interpret the indicator.
- Levels above 100:When the indicator exceeds that level, it means that the market is overbought.
- Zero line:Above, positive indicator values, uptrend. Below, negative values, downward trend.
- Levels below -100:When the indicator is below this level, it is interpreted that the market is oversold.
Do trading with McClellan Oscillator
Like most technical analysis indicators, its use extends to different areas. That is, there are different ways to use it to try to predict the future of prices. Of course, in contrast to the advance / decrease line, the McClellan oscillator can provide specific buy or sell signals. In this sense, the most used and popular form is that of divergences:
Divergences occur when the indicator moves in the opposite direction to the indicator. Likewise, we can distinguish between bullish and bearish divergences.
- Bullish Divergences:The price of the index moves in a bearish direction, while the indicator moves in a bullish direction. It warns us that the downtrend may be ending. And therefore it can be a long position signal or close of short positions .
- Bearish Divergences:The index price moves in a bullish direction and the indicator does so in a bearish direction. It warns us that the uptrend may be ending. So, it is a possible signal of short position or closing of long positions.
Ultimately, this indicator is a very popular indicator. It is an indicator that, correctly used, can give very good results. However, we must always remember that before applying any of these techniques we must empirically check that they work in certain assets. In other words, this indicator of market breadth may work very well in one index and not in another.