Subject: Technical Analysis - McClellan Oscillator and Summation Index

Last-Revised: 23 Dec 1997
Contributed-By: Tom McClellan

In 1969, Sherman and Marian McClellan developed the McClellan Oscillator and its companion tool the McClellan Summation Index to gain an advantage in selecting the better times to enter and exit the stock market. This article gives a brief overview of the McClellan Oscillator and Summation Index.

Every day that stocks are traded, financial publications list the number of stocks that closed higher (advances) and that closed lower (declines). The difference between these numbers is called the daily breadth. The running cumulative total of daily breadth is known as the Daily Advance-Decline Line. It is important because it shows great correlation to the movements of the stock market, and because it gives us another way to quantify the movements of the market other than looking at the price levels of indices.

Another indicator is called the daily breadth. Each tick mark on a daily breadth chart represents one day's reading of advances minus declines. In order to identify the trend that is taking place in the daily breadth, we smooth the data by using a special type of calculation known as an exponential moving average (EMA). It works by weighting the most recent data more heavily, and older data progressively less. The amount of weighting given to the more recent data is known as the smoothing constant.

We use two different EMAs: one with a 10% smoothing constant, and one with a 5% smoothing constant. These are known as the 10% Trend and 5% Trend for brevity. The numerical difference between these two EMAs is the value of the McClellan Oscillator.

The McClellan Oscillator offers many types of structures for interpretation, but there are two main ones. First, when the Oscillator is positive, it generally portrays money coming into the market; conversely, when it is negative, it reflects money leaving the market. Second, when the Oscillator reaches extreme readings, it can reflect an overbought or oversold condition.

While these two characteristics are very important, they merely scratch the surface of what interpreting the Oscillator can reveal about the stock market. Many more important structures are outlined in the book Patterns For Profit by Sherman and Marian McClellan, available from McClellan Financial Publications.

If you add up all of the daily values of the McClellan Oscillator, you will have an indicator known as the McClellan Summation Index. It is the basis for intermediate and long term interpretation of the stock market's direction and power. When properly calculated and calibrated, it is neutral at the +1000 level. It generally moves between 0 and +2000. When outside these levels, the Summation Index indicates that an unusual condition is taking place in the market. As with the Oscillator, the Summation Index offers many different pieces of information in order to interpret the market's action.

Among the most significant indications given by the Summation Index are the identification of the end of a bear market and the confirmation of a new bull market. Bear markets typically end with the Summation Index below -1200. A strong rise from such a level can signal initiation of a new bull market. This is confirmed when the Summation Index rises above +2000. Past examples of such a confirmation have resulted in bull markets lasting at least 13 months, with the average ones lasting 22-24 months.

The McClellans publish a stock market newsletter called The McClellan Market Report. Sherman McClellan and his wife Marian McClellan were the originators of the McClellan Oscillator; Tom McClellan is their son.

For more information, please contact Tom McClellan at (800) 872-3737, or visit the web site at http://www.mcoscillator.com.

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