# McClellan Oscillator: what is and how to use it

The **McClellan Oscillator**, developed by Sherman McClellan, is very useful for testing the solidity and consistency of a trend.

This oscillator is based on the difference between the number of stocks growing and the number of stocks falling.

The following **formula** is used to calculate it:

**(No. of securities upward – No. of securities downward) / (No. of securities upward + No. of securities downward)**

There is a difference between the upside and the downside stocks in the numerator.

In the **denominator**, we find the total number of securities on which we have calculated the difference.

On this value, we then calculate the difference between an **exponential moving average at 19 and 39 periods**.

When the 19-period average goes above the 39-period average, the oscillator assumes positive values.

Values above zero signal that there has been a marked increase in the number of growth stocks.

Conversely, when the 19-period average drops below the 39-period average, the oscillator assumes negative values.

Values below zero show not that there has been an increase in the number of stocks with downward action.

## Using the McClellan oscillator to Identify Bullish and Bearish trend

Using the McClellan oscillator allows you to identify the bullish or bearish phases of the market.

A bullish phase occurs when the oscillator has an increasing trend and assumes positive values.

Conversely, there is a bearish phase when the oscillator has a decreasing trend and assumes negative values.

The oscillator reports changes of momentum in the marketplace, through negative or positive differences compared to the prices.

We can divide its oscillation-band into three zones:

Two “extreme” zones (above +100 and below -100).

The achievement of these thresholds is a signal of confirmation and continuation of the trend.

Two intermediate areas, similar to areas of overbought (between +70 and +100 points) and oversold (between -70 and -100 points).

Reaching these thresholds means a decrease in the trend’s strength.

An internal area that signals a lateral consolidation phase.

## Trading Signals

The achievement of the areas of overbought or oversold does not provide signal trading.

The signal must arrive by prices from an oscillator inversion or by a divergence between the market trend and the oscillator.

The McClellan Oscillator must confirm a bullish signal provided by prices.

The oscillator must fall in the oversold zone (between -70 and -100) and then reverses to the upside.

It is also possible to seek a positive divergence between the price trend and that of the oscillator.

A bearish signal provided by prices is confirmed by the McClellan Oscillator.

The oscillator must first rise into the overbought zone (between +70 and +100) and then reverses to the downside.

Alternatively, it is possible to search for a negative divergence between the price trend and that of the oscillator.

When the McClellan Oscillator rises above +100 points or falls below -100, it provides an important signal of strength.

Here, it will show that the current bullish or bearish trend can continue.

If the oscillator rises above +100, it means that there has been a strengthening of the upward pressure on the market.

In the very short term, quick correction is possible but a further leap forward is likely.

If the oscillator goes up below -100, it means that there has been a strengthening of the bearish pressure on the market.

We calculate the McClellan oscillator on different baskets of securities: it is in fact calculated on the listed securities of the S&P 500, NYSE, and Nasdaq.

**More from Finance Strategy System**