McClellan Oscillator
Tue, Apr 15The McClellan Oscillator is a technical indicator designed to assess the overall market behavior rather than the performance of individual assets. Developed by Sherman and Marian McClellan for the New York Stock Exchange (NYSE), it is now maintained by their son Tom.
This indicator essentially evaluates the momentum of the market's underlying breadth. A reading above zero indicates positive momentum, while a reading below zero signifies negative momentum. Additionally, it serves as an overbought/oversold indicator when it exceeds +100 or falls below -100, respectively.
During significant trend changes, the indicator often reaches an extreme level, after which the market may not respond, indicating a potential shift in the market's tone and a higher likelihood of an overall trend change.
The McClellan Oscillator is calculated by subtracting the number of advancing assets from the number of declining assets across the entire market to determine the net advances and declines.
Momentum
Two moving averages are computed based on this net market behavior: one for a 39-day period and another for a 19-day period. The McClellan Oscillator is derived from the difference between these two moving averages, specifically by subtracting the 39-day average from the 19-day average. When the McClellan Oscillator is positive, it indicates that advances are prevailing in the market, while a negative Oscillator suggests that declines are dominating. Traders interpret this as a signal of the overall market momentum.
Overbought / Oversold
Readings above 100 or below -100 indicate that the market is either overbought or oversold, respectively. A buy signal is generated when the Oscillator moves from -100 or lower into positive territory. Conversely, a sell signal is triggered when the Oscillator shifts from 100 or higher into negative territory.
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