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.
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.