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Chart In Focus

Quiet McClellan Oscillator

Chart In Focus
March 06, 2024

Since late January 2024, the daily readings of the NYSE's McClellan A-D Oscillator have been contained in a very tight range.  They have also been showing us only "simple" structures, which carries and interesting message.

A "complex" structure in the McClellan Oscillator (and in some other indicators too) is one that sees chopping up and down while on one side of the zero neutral level.  The message of a complex structure is that the side on which it forms is the side that is "in charge".  This message persists until it is canceled by a divergence versus prices, or canceled by a later "simple" structure's message on the same side of zero.

A "simple" structure involves the Oscillator just going across the zero line and back, without building any complexity.  A simple structure says that its side is NOT in charge.

What we have had since late January 2024 is a fascinating collection of multiple alternating simple structures on both sides of zero.  The message is that neither side has been in charge, even though the major averages were able to climb a little bit higher to make incrementally higher price highs.  In a condition like that, the situation is ripe for either side to make an assertive move and seize control, and we are left to watch for signs of which side is doing that.

At the same time we are seeing this back and forth near the zero line, we are seeing the Oscillator remain in a very tight range of values.  I have been studying this aspect of the Oscillator's behavior, and years ago found that a 15-day lookback period made for a useful indicator, seen in the chart below.

15-day range mcclellan oscillator

Most of the time, a very low reading for this 15-day range indicator is a great marker for a price top, because quietness in the stock market is a sign of complacency.  Like any rule, there are exceptions, though, and the last two very low readings highlighted in red are good examples of how such exceptions can occur.

How low is low enough for this indicator is a reasonable question.  The horizontal threshold line is arbitrarily drawn, using the LAR method (Looks About Right).  Its purpose is to help the eye compare a current level to what "low" has meant in the past.  I would not propose trying to create an automated trading signal out of such an indicator.  This is information about a condition, and it is not a "signal" like crossing a moving average, or reversing a Price Oscillator.

It is still an important message to pay attention to, noticing the complacency it reflects for stock prices.  Getting to a condition of complacency just as the slope of the uptrend is shallowing out, and the energy is going out of an advance, is a very typical prelude for a downward move.

Tom McClellan
Editor, The McClellan Market Report

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