McClellan Oscillator

Market breadth indicators are a powerful tool of technical analysis in traders’ hands. They determine the direction of the market and help to identify if the market is bullish, bearish or neutral. These indicators’ value lies in the fact that they usually change direction before the major market indices and work well on peaks.

One peculiar feature that characterizes breadth indicators is that it appears more effective when analyzing equities and indices. Another is that it is predominantly used for swing and long-term trading. In any case, market breadth indicators are worth a closer look. And, in particular, one of the popular indicators, the McClellan Oscillator (MO).

What is the McClellan Oscillator?

Sherman and Marian McClellan came up with the McClellan Oscillator in 1969 and described its concept in detail in their book Patterns for Profit: The McClellan Oscillator and Summation Index.

The MO is one of the most in-demand market breadth indicators used for technical analysis. The indicator is designed to analyze the ranges of the market based on the spread of the total number of advancing and declining issues on the New York Stock Exchange (NYSE) and the NASDAQ.

The MO is based on the difference of faster and slower exponential moving average (EMA) with the periods of 19 and 39 days. The indicator can take both positive and negative values. If the short-term average (19 days) is higher than the long-term average (39 days), the value of the indicator will be positive and the trend is bullish. On the contrary, if the short-term average (19 days) is lower than the long-term average (39 days), the indicator will be negative and the trend is bearish.

How to calculate the McClellan Oscillator

The MO is calculated in three steps:

  1. First, you calculate the simple average for the number of advancing issues and the number of declining issues. These are the prior day EMA values for the 19- and 39-day EMA.
  2. The second step is to calculate the 19- and 39-day EMAs using the formulas mentioned further in the article.
  3. And finally, subtract the 39-day EMA from the value of the 19-day EMA.

The formula for the McClellan Oscillator

As was mentioned above, to calculate the MO, you must subtract the 39-day EMA from the 19-day EMA. The EMA is calculated by determining the difference between advancing and declining issues. Simplifying the calculation into one formula looks something like this:

(19-day EMA of Advances−Declines)−(39-day EMA of Advances−Declines)

To calculate the 19-day EMA use the following formula:

(Current Day Advances−Declines)∗0.10+Prior Day EMA

And to calculate the 39-day EMA, respectively:

(Current Day Advances−Declines)∗0.05+Prior Day EMA

For the comparison of values over longer periods of time, use the adjusted formula:

(19-day EMA of ANA)−(39-day EMA of ANA)

ANA stands for the adjusted net advances and is calculated by:

Advances−Declines

⎯⎯⎯⎯⎯⎯⎯⎯⎯⎯⎯⎯⎯⎯⎯⎯⎯

Advances+Declines​

To calculate 19- and 39-day EMA for the adjusted formula use:

(Current Day ANA−Prior Day EMA∗0.10+Prior Day EMA

(Current Day ANA−Prior Day EMA)∗0.05+Prior Day EMA

How to trade with the McClellan Oscillator

Like most technical analysis indicators, the MO’s use extends to different areas. That is, there are different ways to use it to predict future prices. This indicator can give specific buy or sell signals. In this sense, the most popular form is analyzing bullish or bearish divergence. Divergence occurs when the indicator moves in the opposite direction.

bearish divergence.jpg

Bullish divergence means that the price of the index is moving in a bearish direction, while the indicator is moving in a bullish direction. This warns us that the downtrend may be over. Therefore, this could be a signal for long positions or to close short positions.

bullish divergence.jpg

Bearish divergence means that the index price is moving in a bullish direction and the indicator is moving in a bearish direction. This warns us that the uptrend may be over. Thus, this is a possible signal to open or close long positions.

The MO is in many ways similar to the moving average convergence divergence indicator (MACD). To keep things simple, analysts and traders understand that when the oscillator is positive, the 19-day EMA is above the 39-day EMA, it is a signal that rising securities are beating falling securities. If the oscillator falls to a negative value, the opposite is true: the securities that are falling have the advantage.

MACD vs Mcclellan.jpg

As with the MACD indicator, when the MO gives a positive value, it is usually a good indicator that the market is best suited for bullish investors. Negative values, on the other hand, are usually a positive sign for bearish investors. Investors should also pay attention to divergences with stock prices, as this can be a sign that the market is preparing for a reversal. Another thing to track is bursts that indicate a longer period of movement, higher or lower, depending on the pull, is about to occur.

How to install McClellan Oscillator

The McClellan Oscillator is a custom indicator and it is not integrated into MetaTrader trading terminals by default. To use it you need to:

  • Download the file: https://www.mql5.com/en/code/24352;
  • Install it in your MetaTrader 5;
  • Open the Indicators page and find the McClellan Oscillator in the alphabetical list;
  • Add the McClellan indicator to the chart.

McClellan Oscillator trading strategies

There are various strategies based on the MO. It can be based, for example, on just one signal: the crossing of the zero level. When the oscillator crosses the zero level from bottom to top, it opens a buy position. When the oscillator crosses the zero line a sell position is opened.

It is also possible to use classic strategies for oscillators. For example: when the oscillator exceeds the value of -70, you buy. When the oscillator decreases +70, you sell. According to this strategy, buy positions are opened when prices are above the moving average, with the indicator line breaking through the zero level. Correspondingly, sell positions are opened when prices are placed below the moving average.

Please, note that working with the McClellan indicator implies the mandatory installation of pending orders and stop-losses in the implementation of any strategy.

Conclusion

At the end of the day, the market is constantly fluctuating, and therefore the McClellan Oscillator calculation, like any technical indicator, changes regularly. If you decide to use this indicator to understand the market and trade on the New York Stock Exchange, do your best to evaluate the true value of the information it generates before taking action. As with most oscillators, it can be difficult to distinguish between true and false signals, and analysts usually become experts at using the MO only over a period of time and in combination with the use of other technical indicators.

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