McClellan Oscillator

economic-dictionary

The McClellan Oscillator is a technical indicator of market width based on moving averages.

The McClellan oscillator is calculated on the lead / decline line. Based on it, it calculates two moving averages for different periods and subtracts them. Graphically:

This indicator is named after 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 rising values ​​and the number of falling values ​​for a given index is calculated. That is, the advance / descent is calculated. Two means are calculated on this value. A short-term exponential moving average and a long-term exponential moving average.

Once the means 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 ​​that go up - number of values ​​that go 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 formula of the indicator, if the short-term average (19 days) is above the long-term average (39 days) the value will be positive. On the contrary, if the short-term average (19 days) is below the long-term average (39 days), the value of the indicator will be negative.

Interpretation of the McClellan oscillator

Knowing that this oscillator takes positive 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 must be bearish.

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 values ​​of the indicator, upward trend. Below, negative values, downtrend.

  • Levels below -100: When the indicator is below this level, it is interpreted as that the market is oversold.

Trading with the 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 / fall 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

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 signal of a long position or a closing of short positions.

  • Bearish divergences: The price of the index moves in a bullish direction and the indicator moves in a bearish direction. It warns us that the uptrend may be ending. So, it is a possible signal to short or close long positions.

In short, this indicator is a very popular indicator. It is an indicator that, used correctly, can give very good results. However, we must always remember that before applying any of these techniques we must empirically verify that they work on certain assets. In other words, this market breadth indicator may work very well in one index and not in another.

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