Choppy or Simple Structures in McClellan Oscillator – By Tom McClellan


Chart In Focus

The McClellan Oscillator value on Feb. 5, 2020 was +23.36.  Taken all by itself, that is not a very useful piece of information.  Yes, it is above zero, meaning slightly positive recent acceleration upward in the Advance-Decline data on the NYSE.  But if you only know the number and nothing else, you miss out on important context.

The number by itself does not tell you anything about the recent trend in Oscillator values.  When Sherman and Marian McClellan wrote their book, Patterns For Profit, in 1970, they called it that for a reason.  Understanding the patterns in the Oscillator’s behavior is key to properly interpreting its message.

This week, I want to focus on one aspect of Oscillator patterns, relating to whether there are “complex” structures or “simple” ones.  A complex structure is one which involves chopping up and down without a crossing of the zero line.  Complexity implies strength for the side of zero on which it is seen.  So a complex structure below zero conveys a message that the bears are the ones in charge.  There can still be a brief rally, even one that takes the Oscillator above zero, but the bears are still presumed to be in charge.

That message can be relieved in one of two ways.  First, the Oscillator can pop up briefly above zero and then go back down, leaving just a simple structure on the dip below zero.  Or second, the Oscillator can start building a complex structure above zero.  Neither of those has happened yet as of this writing.

When there is a simple structure, like the most recent move above the zero line, the message is of a lack of authority for that side.  So even though we are seeing new all-time price highs on some of the major averages, the Oscillator is saying that there are still problems with the bulls’ case.

There is one more relevant item in this week’s chart which is worth discussing, and that is the downtrend line across the recent Oscillator highs.  The current pop up above the zero line came up just to that line, but not through it.  If the pop fails here and turns the Oscillator back down again, that would amplify the message that the bears are still in charge.

When an Oscillator downtrend line like this gets broken, that can be an important message that a new uptrend phase is getting started.  The more organized the Oscillator readings are on that trendline, the more important the message is of its breaking.

Tom McClellan
Editor, The McClellan Market Report

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About the author

Sherman and Marian's son Tom McClellan has done extensive analytical spreadsheet development for the stock and commodities markets, including the synthesizing of the four-year Presidential Cycle Pattern. He has fine tuned the rules for interrelationships between financial markets to provide leading indications for important market and economic data. Tom is a graduate of the U.S. Military Academy at West Point where he studied aerospace engineering, and he served as an Army helicopter pilot for 11 years. He began his own study of market technical analysis while still in the Army, and discovered ways to expand the use of his parents' indicators to forecast future market turning points. Tom views the movements of prices in the financial market through the eyes of an engineer, which allows him to focus on what the data really say rather than interpreting events according to the same "conventional wisdom" used by other analysts. In 1993, he left the Army to join his father in pursuing a new career doing this type of analysis. Tom and Sherman spent the next 2 years refining their analysis techniques and laying groundwork. In April 1995 they launched their newsletter, The McClellan Market Report, an 8 page report covering the stock, bond, and gold markets, which is published twice a month. They utilize the unique indicators they have developed to present their view of the market's structure as well as their forecasts for future trend direction and the timing of turning points. A Daily Edition was added in February 1998 to give subscribers daily updates on their indicators and also provide market position indications for stocks, bonds and gold. Their subscribers range from individual investors to professional fund managers. Tom serves as editor of both publications, and runs the newsletter business from its location in Lakewood, WA.