INDICATORS

Here's A Filter For Short-Term Indicators

Breadth Of Fresh Air

by Gregory L. Morris

The significance of the levels of the McClellan summation index can help improve your trading results.

I was writing my second book, The Complete Guide To Market Breadth Indicators, when I became aware of some significant facts. Here's one: If you had to select one market breadth indicator that would tell you when to invest and when to be on the sidelines, which would it be? During my research, I discovered it would be the McClellan summation index.

Why, you ask? I'll tell you - but before I do, here's a quick rundown on the topics I'll have to cover in order to fully explain why:

  • An exponential moving average (EMA), which gives more weight to the most recent data and is quicker at responding to price action than the more common simple moving average.
  • Advancing issues (A = advances), which are the number of stocks that increased in price during the day.
  • Declining issues (D = declines), which are the number of stocks that declined in price during the day.
  • The advance decline line, which is the daily difference between advances and declines, and then a running sum is maintained each day.
  • The McClellan oscillator, which is calculated by subtracting the 39-day exponential moving average from the 19-day exponential moving average of net advances (A - D). And finally,
  • The McClellan summation index, which is the daily summation of the McClellan oscillator:

    •   
    McClellan oscillator:
19-day exp. avg. (A - D) - 39-day exp. avg. (A - D)
McClellan summation index:
 * (McClellan oscillator)


    The McClellan summation index has developed a life of its own. Not only is it a good indicator of longer-term breadth and direction, but the levels of the index are also important. Its creators, market technicians Sherman and the late Marian McClellan, have made a couple of important modifications to this indicator since its inception in the 1960s.

      ...Continued in the December issue of Technical Analysis of STOCKS & COMMODITIES

    Excerpted from an article originally published in the December 2005 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2005, Technical Analysis, Inc.


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