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I’m going to do a few posts looking at the McClellan Oscillator, and I wanted to take a moment to define just what it is and what it is not.

Like most formulas that get pared down to a single name (Sharpe Ratio, CCI, whatever) the McClellan Oscillator has taken on its own bit of “mystique”. I think all this indicator worship is just silliness.

The oscillator is a fairly straightforward calculation that uses the number of advancing versus declining issues to capture the degree of participation in stock market moves (in what I call on this blog the “intermediate time frame”). For example, we might try to gauge whether our most recent rally was driven by a large number of individual stocks (i.e broad-based support), or just a few big names.

The chart below is taken from StockCharts.com (symbol $NYMO) and shows the NYSE ratio-adjusted McClellan Oscillator. Click here for a nice rundown on how to calculate the indicator.

(Click to enlarge:)

2009042101

Some last notes:

(1) As you might guess, the number of advancing vs declining issues tracks price changes pretty closely, meaning up days tend to have more advancers than decliners (pushing the oscillator up), and vice-versa. More on this in a later post.

(2) There are multiple flavors of the McClellan Oscillator. I’m using what (I think) is the most common one (and the one pictured in the chart above) – by only looking at the NYSE, and using a ratio-adjusted variation that makes it easier to compare the oscillator today versus the distant past.

More to follow.

Source: Defining the McClellan Oscillator