McClellan Oscillator Breadth Indicator

McClellan oscillator is an important indicator which evaluates the market breadth or difference between advancing and declining stocks of NYSE and indicates trend changes. It was developed by Sherman and Marian McClellan in 1969. McClellan oscillator is mainly used by intermediate traders and also used by short-term traders especially when it indicates overbought and oversold conditions.

By definition McClellan oscillator is the numerical difference between 10% trend and 5% trend or between 19-day and 39-day Exponential Moving Averages (EMA). EMAs of the difference between total advancing stocks and total declining stocks of the day (or is the Daily Advance Decline Line) is used. So the simplified formula is,

McClellan Oscillator = (19-day EMA of A-D) – (39-day EMA of A-D)

Basic idea behind McClellan oscillator is that a trend is bullish or bearish when most number of stocks participates in it. A small number of stocks making large gains (in a bullish trend) or losses (in a bearish trend) indicate that the trend is weakening. Thus analyzing of market breadth can indicate trend strength and changes.

McClellan oscillator offers mainly two types of interpretations. First, Positive values of the oscillator represent money coming into the market (bullish activities) and negative values represent money going out of the market (bearish activity); and the magnitude of the oscillator is the indicator of how much money is coming in/going out. Second, overbought and oversold conditions are identified when McClellan oscillator is in extremes (beyond 100 in either direction).

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