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Technical Indicators & Overlays
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June 21, 2014
The McClellan Oscillator is a breadth indicator developed by Sherman and Marian McClellan in the late 1960s. It is derived from net advances, which is the number of advancing issues of an exchange or index less the number of declining issues. The oscillator is the difference between the 19-day exponential moving average of net advances and the 39-day exponential moving average. As such, the McClellan Oscillator functions as a momentum indicator. The oscillator is also a gauge of market breadth. If an index is rising but declining issues outnumber advancing issues, the rally is narrow.
One drawback of using net advances is that the total number of issues trading on an exchange such as the NYSE or NASDAQ will change over time. One way to account for the dynamic nature of the total number of issues is to ratio-adjust net advances as a percentage of total advancing and declining issues. By using ratio-adjusted net advances, we are able to compare McClellan Oscillator values over extended periods of time. Comparing McClellan Oscillator values today for the NYSE versus values 10 or 20 years ago without such ratio adjustments would be difficult, since the number of issues trading on the NYSE has risen from around 2,000 in 1990 to over 3,500 in 2000. Today, roughly 3,200 issues trade on the NYSE.
Calculating the McClellan Oscillator
As we mentioned, the McClellan Oscillator consists of several components. These include:
Measuring the breadth and duration of an investment’s or portfolio’s drawdown while ignoring upside volatility.