Thursday, June 12, 2008

What The McClellan Oscillator Is Suggesting

The McClellan Oscillator is a measure of breadth developed by Sherman and Marian McClellan. If you are not familiar with the McClellan Oscillator I would suggest you familiarize yourself with it, as it can be quite valuable in assessing the market. Here is a link to the McClellan’s website. In general, strong breadth numbers (NYSE advancing issues minus declining issues) cause the oscillator to rise, and weak breadth numbers cause it to fall. A good portion of the time you’ll find the oscillator value to lie between -100 and +100.

As with most breadth and volume indicators, the value for the McClellan Oscillator varies a bit depending on your data provider. For instance, tonight the reading on the McClellan’s website was about -245, Tradestation was showing -240, and Worden Bros. TC2000 was showing -204. Since I was encountering some issues with the Tradestation data and don’t currently have the McClellan’s official historical database, I used the TC2000 data for tonight’s testing. TC2000 users may find it listed as T2106 on their symbol list. In general, the data provider doesn’t normally matter as long as you are consistent in your testing. The data goes back to 1986.

Readings of less than -200 are uncommon and often signal an impending short-term reversal. To illustrate I ran a few tests. The first one looks to buy the S&P 500 on any dip in the McClellan Oscillator below -200 and sell “X” days later. Results below:

Sixteen for seventeen 11 and 12 days out. High average trade. This appears to provide a quantifiable edge.
For the next test I devised a strategy that would buy when the oscillator dropped below -200 and then sell when it moved back above zero. Below is a screenshot of the performance report for this strategy.

Seventeen for seventeen with an average profit of 3.25% and an average holding period of 8 days.

The CBI isn’t the only breadth indicator suggesting an edge to the long side.


Anonymous said...

Are you using the regular McClellan or the ratio adjusted 0 level?

Anonymous said...

well looking at future, your CBI of 8 is already paying off... :)

Rob Hanna said...

Direct from TC200:

"The McClellan Oscillator is calculated by subtracting a 39 day moving average of (Advances – Declines) from a 19 day moving average of (Advances – Declines)."

This is the mathmatical equivilant of the 5 and 10% smoothing that is mentioned on the McClellan's site.


Jeff said...

Good stuff Rob, thanks.

Anonymous said...

Well, let's see where they close... I thought the bounce would last a bit longer, didn't expect we get faded intraday... wow... so if we go lower, does CBI go 9 or is today intra day bounce already reset it...?

Marc said...

I've been tempted to go long but I'm still not seeing any washout selling. The action is very bearish and as history shows, the CBI or whatever oversold/pessimistic indicator you use, can easily get much worse before finding the bottom.

I'm waiting for support levels to get close before going long. In the meantime I love the QIDs.


Anonymous said...

where can we find the traditional oscillator for free. stock charts only has the ratio adjusted

mOOm said...

Love your blog - would be interested in you investigating the "Weird Wollie Wed" phenomenon named after Don Wolanchuk, which would say I suppose buy the Wednesday of the week before options expiration and sell at the options expiry. Maybe we could add some condition on the Wednesday having to be a down day.

Writing calls is the most popular investor options strategy:

Lakonishok J., I. Lee, N. D. Pearson, and A. M. Poteshman (2007) Option market activity, The Review of Financial Studies 20(3): 813-857.

and so pushing the market up into expiration would benefit the market makers who have bought the calls to the extent they're not hedged, though I'm not saying that this is what happens...

Anonymous said...

mcclellan OSC was about -250 weds. and -200 thursday, so the low volume short squeeze friday last 2 hours was a decent result...weird wollie theory is not a buy at all, rather it's to look for increased volatility from wollie weds. and a weak close to the pre-op-ex week, so that the big boyz can scoop up the cheap calls or sell fat puts for an op-ex week blast off...wollie weds. begins the roll where the boys roll to sept index futures and july options, out of the june, this increases the volatility...
...if we can get a 60min chart pullback monday it looks like a buy for the positive june op-ex seasonality and full moon 6/18(SPX 1440 hit last full moon), summer solstice 6/20.

Rob Hanna said...

Moom & Deac,

Thanks for the comments. Weird Wollie sounds interesting and I'd be happy to play around with it. I need to understand it better, though. I am not familiar with it and haven't yet located the original paper that Moom mentioned. Information about it that I've seen written appears inconsistent. Therefore, I feel I need a better understanding myself before testing it.


mOOm said...

Rob - thanks for your reply. The paper I cited has nothing to do with the Wierd Wollie Wed effect. I've long followed Don Wolanchuk's comments on Silicon Investor. It's hard to get a grip on what his ideas are most of the time. I assume this is deliberate on his part. But clearly he is often optimistic about a rise in the market following the Wednesday before the expiration week, while commenting that we could expect downside or volatility heading into it.