McClellan Oscillator: Definition, Uses, and What It Indicates

What Is the McClellan Oscillator?

The McClellan Oscillator is a market breadth indicator that calculates the difference between advancing and declining issues on a stock exchange, such as the New York Stock Exchange (NYSE) or NASDAQ.

The indicator shows shifts in sentiment in the indexes, known as breadth thrusts, and helps analyze the strength of an index trend through divergence or confirmation.

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Key Takeaways

• The McClellan Oscillator formula can be applied to any stock exchange or group of stocks.
• A reading above zero confirms a rise in the index, while readings below zero confirm a decline.
• If the index rises and the oscillator falls, it warns of a potential decline in the index. If the index falls and the oscillator rises, it indicates a potential rise in the index. This is called divergence.
• A significant change from a negative to positive reading, such as a move of 100 points or more, is called a breadth thrust. It may indicate a strong reversal from downtrend to uptrend on the stock exchange.

The Formula for the McClellan Oscillator

The McClellan oscillator has two formulas: the original formula and an adjusted formula that considers changes in the number of listed stocks on the exchange. The adjusted formula allows for better value comparison over longer periods of time.

McClellan Oscillator = (19-day EMA of Advances − Declines) − (39-day EMA of Advances − Declines)

19-day EMA = (Current Day Advances − Declines) * 0.10 + Prior Day EMA

39-day EMA = (Current Day Advances − Declines) * 0.05 + Prior Day EMA

Adj. McClellan Oscillator = (19-Day EMA of ANA) − (39-Day EMA of ANA)

Adj. Net Advances (ANA) = Advances − Declines / Advances + Declines

19-day EMA = (Current Day ANA − Prior Day EMA) * 0.10 + Prior Day EMA

39-day EMA = (Current Day ANA − Prior Day EMA) * 0.05 + Prior Day EMA

where:

EMA = Exponential moving average

Advances = Number of stocks trading above the previous day’s close

Declines = Number of stocks trading below the previous day’s close

How to Calculate the McClellan Oscillator

1. To begin the calculation, track Advances – Declines on a stock exchange for 19 and 39 days. Calculate a simple average for these, not exponential moving average (EMA).
2. Use these simple values as the Prior Day EMA values in the 19- and 39-day EMA formulas.
3. Calculate the 19- and 39-day EMAs.
4. Calculate the McClellan Oscillator value.
5. For subsequent calculations, use the calculated value as the Prior Day EMA and calculate EMAs instead of simple averages.
6. If using the adjusted formula, follow the same steps, but use ANA instead of Advances – Declines.

What Does the McClellan Oscillator Tell You?

The McClellan Oscillator is a market breadth indicator that technical analysts use alongside other tools to assess the overall state of the stock market and the strength of its current trend.

Comparing the indicator to price movements of indexes reflects the sentiment based on all the stocks in an exchange or major indexes such as the S&P 500.

Positive and negative values indicate whether more stocks are advancing or declining. The indicator is positive when the 19-day EMA is above the 39-day EMA and negative when the 19-day EMA is below the 39-day EMA.

A rising positive indicator suggests accumulated stocks on the exchange, while a falling negative indicator suggests stocks being sold. Typically, this confirms the current trend in the index.

Crossovers from positive to negative or vice versa may signal a trend change in the index or exchange being tracked. A large move, typically of 100 points or more from negative to positive, is known as a breadth thrust. It indicates many stocks moving up after a bearish move, which can be a positive signal suggesting a bottom in the index and a general upward movement in prices.

When index prices and the indicator move in opposite directions, it suggests a lack of strength in the current index trend. Bullish divergence occurs when the oscillator rises while the index falls, indicating that more stocks are starting to advance and the index may rise soon.

Bearish divergence occurs when the index rises while the oscillator falls, suggesting fewer stocks are sustaining the advance and prices may start to decrease.

The Difference Between the McClellan Oscillator and McClellan Summation Index

The McClellan Oscillator, developed by Sherman and Marian McClellan, calculates the difference between advancing and declining stocks, while the McClellan Summation Index adds the current day’s McClellan Oscillator value to the previous day’s index. The Summation Index is a cumulative measure, making it more applicable to broader and longer-term price trends, whereas the oscillator is useful for shorter-term trends.

Limitations of Using the McClellan Oscillator

The indicator tends to produce numerous signals, including breadth thrusts, divergence, and crossovers. Not all signals will result in the expected price/index movement, leading to potential false signals. Therefore, it’s advisable to combine the indicator with price action analysis and other technical indicators.

The indicator can also exhibit choppiness and rapidly move between positive and negative territory. Such action indicates a choppy market but may only become evident after the indicator has made several whipsaw moves.

Before relying on the indicator for trading purposes, study its behavior over extended periods and in different market conditions.