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McClellan Oscillator

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”.

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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 (a.k.a.: Regular Divergence)

  • Bullish Divergence = Lower lows in price and higher lows in the McClellan Histogram
  • Bearish Divergence = Higher highs in price and lower highs in the McClellan Histogram

Hidden Divergence (a.k.a.: Reverse, Continuation, Trend Divergence)

  • Bullish Divergence = Lower lows in McClellan Histogram and higher lows in price
  • Bearish Divergence = Higher highs in McClellan Histogram 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.

The materials presented on this website are solely for informational purposes and are not intended as investment or trading advice. Suggested reading materials are created by outside parties and do not necessarily reflect the opinions or representations of Capital Market Services LLC. Please refer to our risk disclosure page for more information.