A technical indicator that reflects the market breadth based on advancing/declining statistics.
Overview
The McClellan Oscillator, developed by Sherman and Marian McClellan, is a market breadth indicator that is based on the smoothed difference between the numbers of advancing/declining statistics. In depth coverage of the McClellan Oscillator is provided in their book “Patterns for Profit”.
The McClellan Oscillator on a daily USD/MXN chart 4/18/2011
Source: VT Trader
Interpretation
The McClellan Oscillator is momentum indicator. As such, it can be traded in much the same way as the MACD indicator. There are three basic techniques for using the McClellan Oscillator to generate trading signals.
Oscillator / Zero-Level Crossover: When the oscillator crosses above zero a buy signal is given. Alternatively, when the oscillator crosses below zero a sell signal is given.
Divergence: Looking for divergences between the McClellan Oscillator and price can prove to be very effective in identifying potential reversal and/or trend continuation points in price movement.
There are several types of divergences:
Classic Divergence (aka: Regular Divergence)
* Bullish Divergence = Lower lows in price and higher lows in the McClellan Oscillator
* Bearish Divergence = Higher highs in price and lower highs in the McClellan Oscillator
Hidden Divergence (aka: Reverse, Continuation, Trend Divergence)
* Bullish Divergence = Lower lows in McClellan Oscillator and higher lows in price
* Bearish Divergence = Higher highs in McClellan Oscillator and lower highs in price
Overbought/Oversold Conditions: The McClellan Oscillator can also be used to identify potential overbought and oversold conditions in price movements. These conditions are generated by comparing the distance between the shorter moving average and the longer moving average. If the shorter moving average separates dramatically from the longer moving average it may be an indication that price is over-extending and will soon return to more realistic levels.
