The McClellan Volume Oscillator is a market breadth indicator that
is based on the smoothed difference between advancing volume and
declining volume of the composite (index or ETF).
The McClellan Volume Oscillator was developed by Sherman and Marian
McClellan. Extensive coverage of the oscillator is provided in their
book Patterns for Profit.
Indicators that use advancing and declining issues to determine the
amount of participation in the movement of the stock market are called
"breadth" indicators. A healthy bull market is accompanied by a large
number of stocks making moderate upward advances in price. A weakening
bull market is characterized by a small number of stocks making large
advances in price, giving the false appearance that all is well. This
type of divergence often signals an end to the bull market. A similar
interpretation applies to market bottoms, where the market index
continues to decline while fewer stocks are declining.
The McClellan Oscillator is one of the most popular breadth indicators
(another popular breadth indicator is the Advance/Decline Line). Buy
signals are typically generated when the McClellan Oscillator falls into
the oversold area of -70 to -100 and then turns up. Sell signals are
generated when the oscillator rises into the overbought area of +70 to
+100 and then turns down.
If the oscillator goes beyond these areas (i.e., rises above +100 or
falls below -100), it is a sign of an extremely overbought or oversold
condition. These extreme readings are usually a sign of a continuation
of the current trend.
For example, if the oscillator falls to -90 and turns
up, a buy signal is generated. However, if the oscillator falls below
-100, the market will probably trend lower during the next two or three
weeks. You should postpone buying until the oscillator makes a series of
rising bottoms or the market regains strength.