The McClellan Oscillator & 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.

The second chart shows an example of the daily breadth. Each tick mark represents one day's reading of advances minus declines. In order to better 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 according to the tradition established by the late P.N. Haurlan who first used EMAs for tracking the stock market in the 1960s. 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.

By adding up all of the daily values of the McClellan Oscillator, one can produce 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 well 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.

Current values for the McClellan Oscillator and Summation Index are available daily on our Data page. In every issue of The McClellan Market Report, we discuss the current market action and the interpretive significance of the McClellan Oscillator and Summation Index. See our Market Reports to learn more about our publications.