AI
Tuesday, June 01, 2004 2:07:06 AM
A New Record for the McClellan Oscillator
On April 27, 2004 the McClellan Oscillator hit a new, all-time high of 318.74, which will cause some to conclude that this is the most powerful surge of breadth in history, and, therefore, extremely bullish for the stock market. That conclusion would be wrong.
What is really happening is that over the years the number of issues traded on the NYSE has increased significantly, and the math of the Oscillator has caused its range to expand proportionately (see the top chart). For example, the beginning calculation for the Oscillator is to subtract declines from advances. If there were 500 total issues traded on the NYSE, and 10% were decliners, the net of advances minus declines would be 450. assuming the same percentage of decliners for today's approximately 3500 NYSE issues would result in advances minus declines of 3150.
Decimalization has also played a part in that an advance or decline is determined by a change of only a penny, so there can be huge, disorienting swings in the breadth ratios from day to day.
While many of us old-timers cut our teeth on and still use the McClellan Oscillator calculated by the original formula devised by the McClellans, historical comparisons can only be made using a ratio-adjusted calculation for the Oscillator. This is done by beginning with the following formula (instead of advances minus declines):
(advances - declines)/(advances + declines)
The resulting ratio-adjusted McClellan Oscillator can be seen on the second chart above. As you can see, the Oscillator reading on April 27 was still high and represents a strong surge of breadth, it is by no means as powerful as the traditional Oscillator would lead us to believe.
Decision Point calculates both versions daily, but the old-timers still prevail -- the chart of the traditional McClellan Oscillator is the most popular content page on our web site. Old habits die hard.
--Carl Swenlin
http://www.decisionpoint.com/ChartSpotliteFiles/040528_McOsi.html
On April 27, 2004 the McClellan Oscillator hit a new, all-time high of 318.74, which will cause some to conclude that this is the most powerful surge of breadth in history, and, therefore, extremely bullish for the stock market. That conclusion would be wrong.
What is really happening is that over the years the number of issues traded on the NYSE has increased significantly, and the math of the Oscillator has caused its range to expand proportionately (see the top chart). For example, the beginning calculation for the Oscillator is to subtract declines from advances. If there were 500 total issues traded on the NYSE, and 10% were decliners, the net of advances minus declines would be 450. assuming the same percentage of decliners for today's approximately 3500 NYSE issues would result in advances minus declines of 3150.
Decimalization has also played a part in that an advance or decline is determined by a change of only a penny, so there can be huge, disorienting swings in the breadth ratios from day to day.
While many of us old-timers cut our teeth on and still use the McClellan Oscillator calculated by the original formula devised by the McClellans, historical comparisons can only be made using a ratio-adjusted calculation for the Oscillator. This is done by beginning with the following formula (instead of advances minus declines):
(advances - declines)/(advances + declines)
The resulting ratio-adjusted McClellan Oscillator can be seen on the second chart above. As you can see, the Oscillator reading on April 27 was still high and represents a strong surge of breadth, it is by no means as powerful as the traditional Oscillator would lead us to believe.
Decision Point calculates both versions daily, but the old-timers still prevail -- the chart of the traditional McClellan Oscillator is the most popular content page on our web site. Old habits die hard.
--Carl Swenlin
http://www.decisionpoint.com/ChartSpotliteFiles/040528_McOsi.html
**Happy Trading**
Your Economy #board- 1948
Discover What Traders Are Watching
Explore small cap ideas before they hit the headlines.
