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McClellan Index

The McClellan Index is an oscillator used by technical analysts to measure the breadth of the market trend. As an oscillator, the McClellan Index is useful to identify overbought and oversold conditions. Developed by Sherman and Marian McClellan, the McClellan Oscillator Index is similar to the Moving Average Convergence Divergence (MACD). The McClellan Index uses advancing and declining issues to derive its measure of the momentum within a market such as the New York Stock Exchange (NYSE) or the NASDAQ.

McClellan Index Definition

The McClellan Index is derived from each day's net difference of the number of advancing issues less the number of declining issues. For those interested in the exact calculation it is covered in the McClellan Oscillator Calculation section at the end of this article. Simply, the McClellan Index is the result of subtracting a 39-day exponential average of the advances minus declines, which is called the 5% index from the 19-day exponential average, called the 10% index.

The McClellan Index is a breadth indicator that measures the strength of a trend by analyzing the number of advances and declines for a market index or exchange. When there are more advances than declines, it is a sign of an up trend. As the number of advances climbs well above the number of declines the breadth of the advance is greater. The same holds true when the market is trending down, where the number of declines exceeds the number of advances. The breadth of the decline can be measured by how many declines exceed the number of advances. Since the McClellan Index uses the number of advances and declines the McClellan Oscillator is not used for individual stocks.

McClellan Index Buy and Sell Signals

Like the RSI Indicator and the MACD, the McClellan Oscillator generates three type of trading signals: overbought and oversold, divergence, and zero line crossovers.

Like other oscillators, the McClellan Index provides overbought and over sold signals. You will receive an overbought signal when the McClellan Index rises into the 100 to 125 range. When the McClellan Index turns down after reaching the 100 to 125 area, it is giving a signal that a downtrend is underway. The McClellan Oscillator gives an oversold signal when it falls through the -100 to -125. Should the McClellan Oscillator turn up after falling into the -100 to -125 area, it is telling you an up trend is beginning. In McClellan Oscillator Charts below, the NYSE McClellan Index reached oversold territory three times and overbought three times in one year.

When the McClellan Index does not reach overbought or oversold, I often look for trends in the high and lows of the oscillator to tell me whether we have an overbought or oversold situation. You should confirm this signal with other technical indicators such as the MACD, the RSI Indicator, and the Parabolic SAR.

Divergence forms when the oscillator leads the underlying index either up or down. Divergence takes place when the indicator gives a trend following signal before the underlying index makes its move. For example, the oscillator has risen to a new high, only to retreat before turning back up again. However, this time it does not reach the prior high. Rather it turns down before achieving that level. Negative divergence shows up when the underlying index.

In the McClellan Oscillator Chart below the McClellan Index for the NYSE generated higher lows in late February 2009, while the NYSE continues to trend down creating a positive divergence. Then in early March 2009, the NYSE turned up as the oscillator indicated. This is an example of when divergence worked properly.

However, as with all indicators, they do not always work as expected. Beginning in the middle of March 2009 and continuing into May, the NYSE McClellan Index generated lower highs. However, the NYSE continued to climb through the middle of June. It did turn down slightly from the middle of June through early July, so to some extent the negative divergence was correct, though somewhat delayed.

When the McClellan Index rises through the zero line, it indicates an up trend is underway. Falling through the zero line tells you a downtrend is in place. This zero line crossover operates in similar fashion to the RSI Indicator. The McClellan Oscillator Chart shows numerous zero line crossovers, each giving a sell or buy signal. With so many signals, it is important to use other indicators to confirm the zero line crossover.

McClellan Index or Oscillator

Calculating the McClellan Index

The daily advances minus declines of an exchange (NYSE or the NASDAQ) form the basis for the McClellan Oscillator. Start by calculating a 39-day exponential moving average (5% index) average and a 19-day exponential moving average (10% index) average. After calculating the two averages each day, subtract the 39-day EMA from the 19-day EMA to get the McClellan Oscillator value.

The formulas are:

5% Index:
((Today's Advances minus Declines - Prior Day's 5% Index) * 0.05) + Prior Day's 5% Index = Today's 5% Index

10% Index:
((Today's Advances minus Declines - Prior Day's 10% Index) * 0.10) + Prior Day's 10% Index = Today's 10% Index

(Note: The first time you begin to calculate an exponential average, you must calculate a simple moving average.)

McClellan Oscillator:
Today's 10% Index - Today's 5% Index = Today's McClellan Oscillator.

The increasing number of issues traded on the NYSE has caused the McClellan Oscillator and other breadth indicators to reach high and low extremes. Unfortunately these higher levels tend to make the application of the McClellan Oscillator more difficult. Using a ratio-adjusted calculation helps to overcome this problem. uses a ratio adjusted McClellan Index.

The ratio-adjusted calculation is performed as follows:

1.      Subtract declines from advances.

2.      Divide the result by the total of advances plus declines.

3.      Multiply that result by 1000.

The rest of the calculation for the McClellan Index is the same.

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