RELATED TOPICS --> | Profiting from Advance/Decline Ratios | How to interpret McClellan Charts |
                               | Catalogue of McClellan Summation Index divergences on the JSE |
                               | Detecting & measuring McClellan divergence with Disparity Charts |
                               | *NEW* View the McClellan Historical Chart Archives |

First invented in 1969, by Sherman and Marion McClellan, the McClellan Oscillator together with the McClellan Summation Index, have come to be recognized by technical analysts worldwide as some of the most useful market analysis tools in existence. The McClellan's have written a book (54 pages, soft cover) summarizing their work, titled "Patterns for Profit". It is available from their web site (http://www.mcoscillator.com) from which they publish daily market information derived from their indicators.

We have discussed the importance of "Market Breadth" in our "Profiting from Advance/Decline Ratios" paper. Citing lack of published market breadth information for the JSE for the private investor, we discussed that we were going to be tracking daily Advance/Decline ratios for the JSE in an Advance/Decline Summation Index Line (ADSIL) which we will publish in our JSE Weekly Market Pulse Report. The ADSIL is merely a running cumulative total to which is added the daily net advances (total advances minus total declines) for the day.

At PowerStocks Research, we have two other powerful JSE ALSH indicators with which we will track market breadth on the JSE and assist with investment timing. The McClellan Oscillator (MCOS), which is derived from two exponential moving averages of the ADSIL and the McClellan Summation Index (MCSI) which is derived from the MCOS. So as you can see, it all starts with the daily advances and declines.

As none of this information is currently available for the private investor we will track these three indicators on our Weekly Market Pulse report (updated every Monday). Note that all three indicators (ADSIL, MCOS and MCSI) work on the ALSH Index only and not individual shares, as they are MARKET indicators.

IMPORTANT NOTE due to the differences between our market size (420+ shares) and the US market size (7,000+ shares) the indexes we maintain will differ in values and thresholds to those published for the US market.

The McClellan Oscillator (MCOS)
The daily net advances swing wildly from day to day and are difficult to interpret directly from a chart. The MCOS is the result of subtracting a 39-day exponential moving average (EMA) of advances minus declines (net advances) from a 19-day exponential moving average. The EMA works by weighting the most recent data more heavily, and older data progressively less.



The MCOS is shown against the JSE for the last 11 years on the left picture and since January 2008 in the right picture. As can be seen above, the McClellan Oscillator is an intermediate-term indicator, but it can also be used for short-term timing when it bottoms in oversold territory -- in the area of minus 8 and below for the JSE.

When the McClellan Oscillator moves below the zero Line a SELL Signal is rendered, and a BUY Signal results when it moves above zero. According to the McClellan's web site : "The McClellan Oscillator offers many types of structures for interpretation, but there are two main ones. First, when the Oscillator is positive, it generally portrays money coming into the market; conversely, when it is negative, it reflects money leaving the market. Second, when the Oscillator reaches extreme readings, it can reflect an overbought or oversold condition."

While these two characteristics are very important, they merely scratch the surface of what interpreting the Oscillator can reveal about the stock market. Many more important structures are outlined in their book.


NOTE-1 : The increasing number of issues traded on stock markets over the years has caused the McClellan Oscillator and other breadth indicators to reach greater high and low extremes over the years, but these new record highs and lows did not accurately reflect the true internal condition of the market when comparing indicator values many years apart. We therefore deploy the Ratio Adjusted Net Advances method in our calculations which (1) subtracts declines from advances, (2) divides the result by the total of advances plus declines, and (3) multiplies that result by 100.

The McClellan Summation Index (MCSI)
The McClellan Summation Index is traditionally a cumulative total of the daily McClellan Oscillator readings and is the basis for intermediate and long-term interpretation of the stock market's direction and power (like the incredible Trendex Curve). The direction of Summation Index movement, up or down, is an indication of whether money is moving in or out of the market.

NOTE-2 : Mathematician James Miekka developed a new formula for calculating the Summation Index that prevents drift and forces it to maintain a consistent relationship with the zero line. Rather than adding the current McClellan Oscillator value to the prior day's Summation Index (the traditional method, which causes the undesired drift), the Miekka formula derives the Summation value directly from the daily net-advances' 19 and 39 day EMA's. This is the method used by PowerStocks to calculate and maintain the index.


The MCSI is neautral at the zero level and typically moves between -100 and +100. When it is outside these boundaries it indicates that unusual conditions are taking place in the market.

As with the Oscillator, the Summation Index offers many different pieces of information in order to interpret the market's action. Among the most significant indications given by the Summation Index are the identification of the end of a bear market and the confirmation of a new bull market. Bear markets typically end with the Summation Index below -150. A strong rise from such a level can signal initiation of a new bull market. This is confirmed when the Summation Index rises well above +100. In the U.S, past examples of such a confirmation have resulted in bull markets lasting at least 13 months, with the average ones lasting 22-24 months.



NOTE-3 Due to the differences between our market size (420+ shares) and the US market size (7,000+ shares) the indexes we maintain will differ in values and thresholds to those published for the US market. To compare values of our index to that of McClellan literature referring to the US markets, multiply by 10 (ie we refer to +100 and -100 as the normal thresholds, whilst in the US it is +1,000 and -1,000) Also note that as we use the Ratio Adjusted Net Advances method for Index calculation, the zero line is the neutral line for the MCSI as opposed to the 1,000 line referred to by the McClellan web site and literature.

BUILDING A SWISS CLOCK FOR THE JSE
The Advance/Decline data we track, together with the McClellan Oscillator and McCLellan Summation Index were used by PowerStocks Labs to build a market timing system that delivered a stunning 1,299% return over the last 11 years with 22 individual trades. Only 2 trades were wrong-way, resulting in minor losses, giving the system 90% accuracy.

Average trade lengths were 107 days and a signal generated on average every 6 months. Each trade averaged 30% compound annual growth rate.

We publish these timing signals on The Weekly JSE Pulse for our paid subscribers, a sample of which is shown below.



READ FURTHER ABOUT IT ---> | The Amazing JSE SwissClock from PowerStocks |
 
Make a Free Website with Yola.