Use the McClellan Oscillator to Identify Overbought and Oversold Market Conditions

The McClellan Oscillator is a market breadth indicator used to measure the difference between the number of advancing NYSE issues and those that are declining. Developed by Sherman and Marian McClellan in 1969, the oscillator leverages exponential moving averages (EMA) and is primarily used for short and intermediate-term trading.

A moving average is a basic tool of technical analysis that shows the average of a the price of a security over a period of time. An exponential moving average, also known as an “exponentially weighted moving average” is a type of moving average that applies weighting averages that decrease over time in order to apply greater importance to more recent data.

The formula for the McClellan Oscillator can be written as:

Where:

• The first is a 19-period EMA, used to represent the shorter-term trend

• The second is a 39-period EMA, used to represent the intermediate trend.

This calculation yields a McClellan Oscillator number that helps the investor determine if the market is currently in either an overbought or oversold condition. Typically, a reading greater than 100 indicates that the market is overbought. In contrast, a reading of -100 is interpreted as an oversold condition. The mid-point of the oscillator is the zero line.
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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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