The McClellan Oscillator was first designed by Sherman and Marian McClellan in 1969. As a substitute for this indicator, traders can also stochastics or RSI when applied to an index such as the S&P 500 or New York Stock Exchange Index (NYSE), as these are both overbought/oversold measures. The McClellan Oscillator, however, adds a different perspective because it works with market breadth. Breadth is defined as the balance between advancing issues (all stocks up at least a penny on the day) and declining issues (all stocks down by at least a penny). In a strong market, advancers will usually overwhelm decliners by a significant margin. The opposite is true when a market turns weak.

The mathematics behind the McClellan Oscillator are complex. Essentially, the oscillator takes two exponentially smoothed moving averages (EMA) of advancers less decliners. The first is a 19-period EMA, which is meant to represent the short- to intermediate-term period. The second is a 39-period moving average, which describes a more intermediate trend.

The formula for the McClellan Oscillator is:

(19-Day EMA of A-D) - (39-Day EMA of A-D)

This calculation results in a specific McClellan Oscillator number. On Thursday, March 25th, for example, the McClellan Oscillator on the New York Stock Exchange closed at –78, up from Wednesday's deeply oversold reading of –168. 

The traditional way to interpret the Oscillator number is as follows. A reading of +100 on the Oscillator means the market has become overbought. While a market can stay overbought for an extended period of time, traders should be alert to any signals of selling pressure. When the oscillator reaches –100 the opposite is true and traders should be alert to a rally. 

The middle point of the oscillator is the zero line. A cross of the zero line after a reading of + or –100 provides confirmation that the previous trend has reversed. 

Typically, the McClellan Oscillator is juxtaposed against the New York Stock Exchange Index (NYSE), as that is considered the broadest measure of trading on that exchange. McClellan Oscillators can be calculated on any exchange, and the Oscillator for the Nasdaq also is vital for diagnosing when that exchange is at an extreme. The Nasdaq overbought/oversold readings are +40 and –40.

On the NYSE, I pay careful attention to readings of + and – 100. However, I give even more emphasis to the Oscillator's own recent "signature" in determining "true" extremes. The signature is a horizontal support or resistance area that aligns with market turns.

Also Read: Multi Wave Oscillator, Crystal Oscillator, Voltage Controlled Oscillator, Colpitts Oscillator, Oscillator Circuit, Mcclellan Oscillator, Clock Oscillator, Hartley Oscillator.