The McClellan Oscillator is a market breadth indicator developed by Sherman and Marian McClellan in 1969. It transforms raw advance-decline data into a momentum oscillator that helps traders identify overbought and oversold conditions, spot trend changes, and time their entries and exits. Here is everything you need to know about this powerful indicator.
What is the McClellan Oscillator?
The McClellan Oscillator measures the difference between two exponential moving averages (EMAs) of the daily advance-decline data. It oscillates above and below zero, with positive values indicating bullish breadth momentum and negative values showing bearish momentum.
Formula: McClellan Oscillator = 19-day EMA of (Advances - Declines) - 39-day EMA of (Advances - Declines)
How the McClellan Oscillator is Calculated
The calculation involves several steps:
- Calculate daily net advances (Advances - Declines)
- Compute the 19-day EMA of net advances (approximately 10% smoothing)
- Compute the 39-day EMA of net advances (approximately 5% smoothing)
- Subtract the 39-day EMA from the 19-day EMA
Understanding the EMAs
The 19-day EMA represents short-term breadth trends, while the 39-day EMA represents intermediate-term breadth trends. When short-term breadth improves faster than intermediate-term breadth, the oscillator rises. When it deteriorates faster, the oscillator falls.
Interpreting McClellan Oscillator Readings
Zero Line Crossovers
The zero line is the neutral point:
- Above zero: Short-term breadth momentum is positive (bullish)
- Below zero: Short-term breadth momentum is negative (bearish)
- Crossing above zero: Potential buy signal
- Crossing below zero: Potential sell signal
Extreme Readings
Extreme readings often signal reversal opportunities:
- Above +100: Overbought, but can remain overbought in strong uptrends
- Below -100: Oversold, potential bounce coming
- Above +150: Extremely overbought, high probability of pullback
- Below -150: Extremely oversold, high probability of bounce
Extreme Reading Example
During the March 2020 COVID crash, the McClellan Oscillator plunged below -400, one of the most extreme readings in history. This indicated massive oversold conditions and preceded a powerful rally. Such extreme readings are rare but often mark major turning points.
Divergences
Watch for divergences between the oscillator and price:
- Bullish divergence: Price makes lower low, oscillator makes higher low
- Bearish divergence: Price makes higher high, oscillator makes lower high
The McClellan Summation Index
The McClellan Summation Index is a cumulative version of the oscillator. Each day's McClellan Oscillator reading is added to a running total, creating a longer-term view of breadth trends.
Summation Index interpretation: When the Summation Index is above zero, the intermediate-term breadth trend is bullish. Below zero, it is bearish. Major market bottoms often occur when the Summation Index falls to -1000 or lower.
Trading Strategies with the McClellan Oscillator
Strategy 1: Zero Line Trading
Trade in the direction of zero line crossovers:
- Buy when the oscillator crosses above zero from below
- Sell or short when it crosses below zero from above
- Use price action for confirmation and entry timing
- Place stops below recent swing lows (for longs) or above swing highs (for shorts)
Strategy 2: Oversold Bounce Trading
Look for buying opportunities when the oscillator reaches extreme oversold levels:
- Wait for the oscillator to drop below -100 (or -150 for stronger signals)
- Watch for the oscillator to turn higher (start forming a bottom)
- Enter long positions when it crosses back above -100
- Target a return to the zero line or prior resistance
Oversold Setup Example
The McClellan Oscillator drops to -120 during a market pullback. Over the next few days, it bottoms at -130 and starts rising. When it crosses above -100, you enter a long position in SPY. Target is a return to zero on the oscillator, stop is below the recent price low.
Strategy 3: Breadth Thrust Confirmation
Strong rallies often begin with breadth thrusts. The McClellan Oscillator can confirm these powerful signals:
- Look for the oscillator to surge from below -50 to above +50 within a few days
- This indicates rapid improvement in market breadth
- Such thrusts often precede sustained rallies
Combining with Other Indicators
The McClellan Oscillator works best with confirming indicators:
- Advance-Decline Line: Confirms the trend direction
- New Highs/New Lows: Adds another breadth perspective
- Price moving averages: Helps with trend identification
- Volume indicators: Confirms conviction behind moves
- VIX: Provides sentiment context
Key Levels and Guidelines
| Reading | Interpretation | Action |
|---|---|---|
| Above +150 | Extremely overbought | Avoid new longs, watch for reversal |
| +50 to +150 | Bullish momentum | Look for pullback entries |
| 0 to +50 | Mildly bullish | Trend following |
| -50 to 0 | Mildly bearish | Caution on longs |
| -150 to -50 | Bearish momentum | Watch for bottoming signs |
| Below -150 | Extremely oversold | Look for reversal setups |
Common Mistakes to Avoid
- Trading extreme readings alone: Extreme readings can persist longer than expected
- Ignoring the trend: In strong trends, overbought/oversold readings are less reliable
- Using in isolation: Always combine with price action and other indicators
- Confusing oscillator with Summation Index: They serve different purposes
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Summary
The McClellan Oscillator is a sophisticated breadth indicator that transforms advance-decline data into actionable signals. By tracking the momentum of market breadth, it helps traders identify overbought and oversold conditions, spot potential reversals, and confirm trend strength. Use it alongside other breadth measures and price action for best results.
Continue learning about market breadth with our guide on the Advance-Decline Line or explore the VIX trading guide for volatility insights.