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The McClellan Indicator is an Efficient Stock Market Oscillator

Among many stock market oscillators, the McClellan indicator stands out. Let’s examine this tool and see how you can best apply it in stock trading.

Contents:

Interact with the underlined words and green dots to get additional details and explanations.

History

The McClellan oscillator was developed by Sherman and Marian McClellan in 1969. Together with the oscillator, they developed the McClellan Summation Index. Main principles of both are described in the book "Patterns for Profit: The McClellan Oscillator and Summation Index".

Essentials

Primarily, the McClellan indicator shows the breadth or spread of the market, or the market range. The mechanism is based on the difference between the fast and slow Exponential Moving Averages (EMA) with periods 19 and 39. This function of the oscillator helps traders mark upward and downward trends.

McClellan Oscillator and the Market Breadth

Market Breadth is the number of stocks rising in price relative to the number of stocks dropping.

Positive market breadth is observed when the number of stocks that are rising exceeds the number of stocks that are falling.

Positive market breadth indicates that the bulls are dominating in the market and helps to confirm price gains in the index or stock. In the meantime, a large number of assets with declining prices indicate bearish momentum and downward movement.

McClellan Oscillator Signals

Generally, this indicator’s signals are similar to the others as they are based on similar principles.

The indicator chart has five important levels. These are +100, +70, 0, -60, and -100. When the indicator crosses them, it is a sign of a potential market entry opportunity.

When the McClellan indicator is above zero, stock charts are in a rising phase.

When the McClellan indicator is below zero, stock charts are in a declining phase.

One of the most common trading strategies is based on zero-level crossing.

When the indicator crosses the zero level bottom-up, that’s an Up-trade signal.

When the indicator crosses the zero level upside-down, that’s a Down-trade signal.

McClellan indicator - Olymp Trade - Blog - 06.06.2022
Fig. 1. To be advised with McClellan indicator charted

The situation when the indicator shows a significant change, such as moving beyond 100 points, and the negative area goes into the positive one, is called breadth thrust. That is a strong market reversal signal which indicates the beginning of a bullish trend.

The function of the +70 and -70 levels of McClellan indicator is similar to other oscillators and indicates the boundaries of overbought and oversold zones. The overbought zone is above +70, and oversold zone is below -70.

Crossing +70 upside-down is a down trade signal, and crossing -70 bottom-up is an up trade signal.

S&P 500 Daily Chart - Olymp Trade - Blog - 06.06.2022
Fig. 2. S&P 500 with McClellan indicator charted

If the oscillator exceeds +100 or falls below -100, then the market is extremely overbought or oversold.

While a correction can be expected in the short term, it usually confirms the current trend.

Similarity of the McClellan Indicator to MACD

As the McClellan oscillator is a technical tool designed specifically for stock market analysis, we suggest traders apply it together with other indicators or price action instead of using it alone. In the meantime, the fact that it is based on a similar mechanism to that of MACD, the latter may be a good alternative for both stock, Forex, and other market sectors. On top of that, MACD has proved to be notably more reliable than McClellan if used alone.

Among many indicators, MACD is available on the Olymp Trade platform. Using it will provide enough knowledge and practice to those traders who want to understand the McClellan indicator, too. Therefore, traders are welcome to learn more about MACD to understand how to best use both indicators.

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Risk warning: The content of the article does not constitute investment advice and you are solely responsible for your trading activity and/or trading results.