The McClellan Oscillator combines market breadth data to create an overbought/oversold oscillator. The McClellan Oscillator uses two moving averages of the market breadth calculation (Advancing Issues on the NYSE [New York Stock Exchange] - Declining Issues on the NYSE).
Advancing issues is defined as the number of stocks on the NYSE that made positive gains for the day. Likewise, the declining issues value is all stocks on the NYSE that had losses for the day.
Generally, overbought is defined as above 70 and oversold is defined as below -70. When the moving average of the Advancing Issues - Declining Issues is above zero, this generally is considered bullish. When the McClellan Oscillator is below zero, this is considered bearish. However, at the extremes, 70 and -70, the McClellan Oscillator could be used as an overbought and oversold indicator. Traders often look for a price correction downward when the McClellan oscillator is above 70 and look for a relief rally when the McClellan Oscillator is below -70.
The McClellan Oscillator is a great addition to a traders' technical analysis arsenal. Rather than relying on price data from one stock, the McClellan Oscillator helps a trader get the big market picture, whether it be bullish, bearish, or neutral.
Another popular market breadth indicator is the TRIN or Arms Index. This indicator combines advancing and declining issues with advancing and declining volume. See Arms Index (TRIN) for more details.
Remember, trading involves serious risk. Only trade with discretionary funds you can afford to lose. Past performance is not indicative of future performance.
Tom Markelson is a contributor to the website OnlineTradingConcepts.com and trades stocks, futures, and options.
A chart showing the McClellan Oscillator is located at the following link: McClellan Oscillator.
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