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The McClellan Oscillator The McClellan Oscillator is a short-term measure of momentum and money flow within the markets based upon the number and volume of stocks advancing vs. number and volume of stocks declining in a given market. The indicator is used to track money moving in and out of the markets. Being an oscillator, it revolves or oscillates around a "zero line." This generally means that money is moving into the market when the oscillator is above the zero line and money is moving out of the market at negative values. If readings are plus or minus 100, the oscillator is said to be over bought or over sold, respectively. This means that at +100, even though the trend may still be up, the market is temporarily over bought, and in need of a rest, or pullback. The opposite would of course be true for readings of -100. This is NOT always the case, however. Based on the strength of the trend and how far the oscillator "swung" the other direction, the oscillator may occasionally go beyond those levels. This does not mean that the market is not over bought or over sold. It may actually be on it's way to being very over-bought or very over-sold. You will usually find that the oscillator does not stay above the +100 line or below the -100 line for more than a couple days. After a very over-bought or very over-sold reading reverses, the oscillator usually goes to the opposite extreme before reversing back agin. This is in contrast to the situation when the oscillator turns direction before the +100 or -100 line, when swings will be less predictable. This means, of course, that such distictions can be risky. This is why we recommend using strict discipline and waiting for the oscillator to "cross" through the zero line in an upward direction to buy "hot" stocks and sell or cover them to around +100. Conversely, sell or short "weak" stocks when it crosses from above to below the zero line and buy or cover around the -100 line. This tends to be a much more reliable trading strategy. Despite the risks, aggressive traders will try to pick the actual top and bottom of the oscillator to try to enhance the productivity of their trade. False turns and very over bought/over sold readings can make this tricky, however. We recommended using the McClellan oscillator along with other timing tools, thereby allowing the investor/trader to make a confident decision and remain with the position throughout the move. |
