McClellan Oscillator

About McClellan Oscillator.

The McClellan Oscillator was developed by Sherman and Marian McClellan. This is a Breadth indicator that is based on the advanced and declined issues (stocks) and calculated in way similar to MACD.

The first step in calculating the McClellan Oscillator is to calculate the Advance/Decline PO (Percentage Oscillator), but using a 1000 multiplier instead of a 100 multiplier. The formula for Advance/Decline PO calculations is:

A/D PO = (Advances - Declines) / (Advances + Declines) x 1000

where Advances is the number of advancing stocks and
Declines is the number of declining stocks.

The McClellan Oscillator applies the Exponential Moving Average (EMA) to the Advance/Decline Oscillator and is based on the MACD formula and calculated as:

McClellan Oscillator = Fast EMA - Slow EMA

where Fast EMA is the exponential moving average with the shorter bar period setting applied to the A/D PO;
and Slow EMA is the exponential moving average with the longer bar period setting applied to the A/D PO

Like the MACD, the McClellan Oscillator is considered to be a momentum indicator that is used to analyze advance/decline data. When the shorter moving average rises above the longer moving average, it is a signal that advancing stocks are dominant and are gaining. Conversely, when the shorter EMA declines below the longer EMA, it is a signal that declining stocks are dominant.

As a momentum indicator, the McClellan Oscillator is used to generate Buy/Sell signals by attempting to anticipate Bullish and Bearish changes in the Advance/Decline statistics.

In technical analysis, McClellan Oscillator reading above plus 100 are considered to indicate overbought and oscillator reading below minus 100 indicate oversold. However, overbought and oversold readings may differ for different indexes and historical periods. As a rule, Buy/Signals are generated on crossovers of the McClellan Oscillator and the center (zero) line: when the oscillator advances into positive territory (above zero) a "Buy" signal is generated and when the oscillator falls into negative territory (drops below zero), a "Sell" signal is generated. At the same time, traders may look at positive and negative divergences between the McClellan Oscillator and the price trend.