Mcclellan oscillator: Meaning, Criticisms & Real-World Uses

What Is McClellan Oscillator?

The McClellan Oscillator is a widely used technical analysis tool that assesses market breadth by measuring the difference between the number of advancing and declining stocks on an exchange over specific periods. It falls under the broader category of momentum indicators within technical analysis. This oscillator provides a visual representation of the market's overall direction and underlying strength or weakness. Traders and analysts use the McClellan Oscillator to identify potential shifts in market sentiment and anticipate trend reversals.⁸⁴, ⁸⁵, ⁸⁶, ⁸⁷

History and Origin

The McClellan Oscillator was developed in 1969 by the husband-and-wife team Sherman and Marian McClellan. Their work stemmed from an effort to better understand the Advance-Decline Line, a traditional market breadth indicator. They sought a method to smooth and analyze daily advance-decline statistics more effectively, ultimately leading to the creation of the oscillator and its companion, the McClellan Summation Index. The McClellans detailed their methodology and insights in their book, Patterns for Profit. Their approach involved applying exponential moving average calculations, a technique whose underlying mathematical principles for tracking market trends were explored by P.N. Haurlan in the 1960s.⁷⁶, ⁷⁷, ⁷⁸, ⁷⁹, ⁸⁰, ⁸¹, ⁸², ⁸³ The McClellan Financial website, run by Sherman and his son Tom, continues to publish analysis based on these indicators.⁷⁵

Key Takeaways

The McClellan Oscillator is a market breadth indicator that quantifies the difference between advancing and declining stocks using exponential moving averages.⁷², ⁷³, ⁷⁴
It serves to gauge market momentum and the balance between buying and selling pressure.⁷⁰, ⁷¹
Positive readings generally indicate bullish market sentiment, while negative readings suggest bearish conditions.⁶⁷, ⁶⁸, ⁶⁹
Traders look for centerline crossovers, extreme readings (overbought/oversold), and divergences between the oscillator and price action to generate signals.⁶⁴, ⁶⁵, ⁶⁶
The indicator is primarily used for analyzing short-term to intermediate-term trends in equity markets.⁶², ⁶³

Formula and Calculation

The McClellan Oscillator is calculated by taking the difference between two exponential moving averages (EMAs) of the net advances. The standard periods used for these EMAs are 19 days (representing a faster trend) and 39 days (representing a slower trend).⁵⁸, ⁵⁹, ⁶⁰, ⁶¹

The general formula is:

\text{McClellan Oscillator} = \text{EMA}_{19}(\text{Advances} - \text{Declines}) - \text{EMA}_{39}(\text{Advances} - \text{Declines})

Alternatively, a ratio-adjusted version of the oscillator normalizes the net advances, making historical comparisons more reliable regardless of the total number of stocks traded on an exchange, such as the New York Stock Exchange.⁵⁷

For the ratio-adjusted McClellan Oscillator:

\text{RANA} = \frac{\text{Advances} - \text{Declines}}{\text{Advances} + \text{Declines}} \times 1000

\text{McClellan Oscillator} = \text{EMA}_{19}(\text{RANA}) - \text{EMA}_{39}(\text{RANA})

Where:

Advances (A) = Number of stocks that closed higher for the period.
Declines (D) = Number of stocks that closed lower for the period.
Net Advances = Advances - Declines.
RANA = Ratio-Adjusted Net Advances (used for normalization).
EMA_n = Exponential Moving Average over n periods. The smoothing constants for the 19-day and 39-day EMAs are approximately 0.10 (2/(19+1)) and 0.05 (2/(39+1)), respectively.⁵⁴, ⁵⁵, ⁵⁶

The calculation for a single EMA value is:

\text{EMA}_{\text{Current}} = (\text{Current Day Net Advances} - \text{EMA}_{\text{Prior Day}}) \times \text{Smoothing Constant} + \text{EMA}_{\text{Prior Day}}

The first EMA calculation typically starts with a simple average of the initial data points.⁵², ⁵³

Interpreting the McClellan Oscillator

The McClellan Oscillator fluctuates around a zero line, providing insights into market momentum. A positive oscillator value indicates that the 19-day EMA of net advances is above the 39-day EMA, suggesting that advancing stocks are currently outnumbering declining stocks, which points to bullish market conditions. Conversely, a negative value signifies that declining stocks are dominating, indicating bearish sentiment.⁴⁸, ⁴⁹, ⁵⁰, ⁵¹

Key interpretive signals include:

Centerline Crossovers: When the McClellan Oscillator crosses above the zero line from negative territory, it can signal a shift towards bullish momentum and potentially a buy signal. A cross below zero from positive territory may indicate a bearish shift and a sell signal.⁴⁶, ⁴⁷
Overbought and Oversold Conditions: Extreme positive readings (typically above +70 or +100) suggest the market is overbought and may be due for a pullback. Extreme negative readings (typically below -70 or -100) suggest the market is oversold and might be poised for an upward correction.⁴³, ⁴⁴, ⁴⁵
Divergence: This occurs when the market's price action and the McClellan Oscillator move in opposite directions. For instance, if the market index is making higher highs while the oscillator makes lower highs, it's a bearish divergence, potentially forecasting a trend reversal to the downside.³⁹, ⁴⁰, ⁴¹, ⁴²

Hypothetical Example

Imagine the daily net advances (advances minus declines) for the NASDAQ Composite over a five-day period are: Day 1: +150, Day 2: +100, Day 3: -50, Day 4: -120, Day 5: +70. To calculate the McClellan Oscillator, we would first determine the 19-day and 39-day exponential moving averages (EMAs) of these net advance figures. For simplicity, let's assume pre-existing EMA values from previous days.

Suppose on Day 0:

19-day EMA of Net Advances = +50
39-day EMA of Net Advances = +30

Using the approximate smoothing constants (0.10 for 19-day EMA and 0.05 for 39-day EMA):

Day 1 (Net Advances = +150):

New 19-day EMA = (150 - 50) * 0.10 + 50 = 100 * 0.10 + 50 = 10 + 50 = +60
New 39-day EMA = (150 - 30) * 0.05 + 30 = 120 * 0.05 + 30 = 6 + 30 = +36
McClellan Oscillator (Day 1) = 60 - 36 = +24

Day 2 (Net Advances = +100):

New 19-day EMA = (100 - 60) * 0.10 + 60 = 40 * 0.10 + 60 = 4 + 60 = +64
New 39-day EMA = (100 - 36) * 0.05 + 36 = 64 * 0.05 + 36 = 3.2 + 36 = +39.2
McClellan Oscillator (Day 2) = 64 - 39.2 = +24.8

Day 3 (Net Advances = -50):

New 19-day EMA = (-50 - 64) * 0.10 + 64 = -114 * 0.10 + 64 = -11.4 + 64 = +52.6
New 39-day EMA = (-50 - 39.2) * 0.05 + 39.2 = -89.2 * 0.05 + 39.2 = -4.46 + 39.2 = +34.74
McClellan Oscillator (Day 3) = 52.6 - 34.74 = +17.86

As the example illustrates, even with a single day of negative net advances, the McClellan Oscillator remained positive, but its value declined. Observing such movements over time helps traders gauge the underlying strength of the NASDAQ or other market.

Practical Applications

The McClellan Oscillator is a versatile tool employed in various aspects of financial analysis, particularly in equity markets. Its primary applications include:

Confirming Market Trends: A sustained positive McClellan Oscillator reading tends to confirm an existing uptrend in a market index, indicating broad participation from advancing stocks. Conversely, a consistently negative reading confirms a downtrend.³⁷, ³⁸
Identifying Breadth Thrusts: A "breadth thrust" occurs when the McClellan Oscillator rapidly moves from a deeply negative reading to a strong positive one (e.g., from below -50 to above +50). This often signals a powerful surge in bullish market breadth and can precede significant rallies or extended advances.³⁴, ³⁵, ³⁶
Spotting Overbought/Oversold Extremes: When the oscillator reaches unusually high or low levels, it alerts traders to potential overbought or oversold market conditions, suggesting that a price correction or reversal may be imminent.³¹, ³², ³³
Complementing Other Indicators: The McClellan Oscillator is rarely used in isolation. Traders often combine it with other technical analysis tools, such as moving averages, Relative Strength Index (RSI), or volume analysis, to confirm signals and develop a more robust trading strategy.²⁹, ³⁰

For instance, analysts might track the Advance-Decline Line for the New York Stock Exchange (NYSEADV) data provided by the FRED St. Louis Fed to calculate and plot the McClellan Oscillator, gaining insights into the broad participation of stocks in market movements.

Limitations and Criticisms

While a valuable tool, the McClellan Oscillator, like all technical indicators, has limitations. One notable criticism is its nature as a lagging indicator; it derives signals from past market data and may not provide immediate indications of market turns or reversals.²⁸ As such, relying on it solely for market timing can lead to false signals, especially in choppy or sideways markets.²⁷

Another limitation is its specificity to the stock market. The McClellan Oscillator is primarily designed for and most effective in analyzing equities and indices, and its direct application to other asset classes like currencies or commodities is generally not recommended due to differences in their underlying market structures.²⁵, ²⁶ Its effectiveness also depends on the quality and breadth of the underlying advance-decline data. If this data is skewed or incomplete, it could misrepresent overall market breadth.²⁴

Furthermore, the interpretation of the McClellan Oscillator can be subjective. The choice of parameters for the exponential moving averages, such as the 19-day and 39-day periods, can be adjusted, potentially leading to varied interpretations of the same market data.²³ For these reasons, financial professionals advise using the McClellan Oscillator in conjunction with other analytical tools to confirm signals and avoid pitfalls.²⁰, ²¹, ²² The Earn2Trade Blog provides a detailed discussion of these and other disadvantages.

McClellan Oscillator vs. McClellan Summation Index

The McClellan Oscillator and the McClellan Summation Index are both market breadth indicators developed by Sherman and Marian McClellan, but they serve different analytical purposes due to their distinct calculations. The McClellan Oscillator is a more responsive, short-term indicator that measures the difference between two exponential moving averages of advancing and declining issues, providing insights into daily or short-term market momentum. It oscillates around a zero line and gives frequent signals for potential short-term trend reversals and overbought/oversold conditions.¹⁶, ¹⁷, ¹⁸, ¹⁹

In contrast, the McClellan Summation Index is a long-term, cumulative indicator that represents a running total of the daily McClellan Oscillator values. This cumulative nature makes the Summation Index much smoother and less volatile, providing a broader perspective on sustained market trends and underlying strength or weakness over longer time horizons. While the oscillator provides signals for short to medium-term timing, the Summation Index is generally used for medium to long-term market analysis, offering fewer, but potentially more significant, divergence and trend signals.¹⁴, ¹⁵

FAQs

What does a positive or negative McClellan Oscillator value mean?

A positive value for the McClellan Oscillator typically indicates that there are more advancing stocks than declining stocks, suggesting a bullish sentiment in the market. Conversely, a negative value implies that declining stocks outnumber advancing ones, pointing to bearish market conditions.¹¹, ¹², ¹³

How can the McClellan Oscillator help identify trend reversals?

The McClellan Oscillator can help identify trend reversals through several signals. A cross above the zero line from negative territory can indicate a potential upward reversal, while a cross below zero from positive territory might signal a downward reversal. Additionally, divergences, where the oscillator's movement contradicts the market's price action, can serve as early warnings of an impending trend change.⁷, ⁸, ⁹, ¹⁰

Is the McClellan Oscillator a standalone indicator?

No, the McClellan Oscillator is generally not recommended as a standalone indicator. Like many technical analysis tools, it is most effective when used in conjunction with other indicators and analysis techniques to confirm signals and provide a more comprehensive view of market conditions.⁴, ⁵, ⁶

What markets can the McClellan Oscillator be applied to?

The McClellan Oscillator is primarily designed for and most commonly applied to equity markets, specifically to stock exchanges like the New York Stock Exchange or [NASDAQ], or to broad market indices. It evaluates market breadth based on advancing and declining issues within these markets.¹, ², ³