THE HAndbook of TECHnICAl AnAlysIsfigure 22.5 Divergences between the NYSE Index and the Five‐Day Moving Average
of the Advance Decline Percent of the Energy Select Sector SPDR.
Courtesy of Stockcharts.com
Another popular breadth indicator that uses AD difference is the McClellan
Oscillator. This breadth oscillator tracks the difference between the 19‐ and
39‐day exponential moving average of the ratio‐adjusted value of net advances.
Detrended readings above the zero or equilibrium level are regarded as bull-
ish while readings below are bearish. We see readings turning from positive
(bullish) to negative (bearish) giving an early warning of the subsequent trend
change in the NYSE index, as observed in Figure 22.6. As a result, we also see
standard bearish divergence between the McClellan Oscillator and the NYSE
index.
Figure 22.7 shows that the McClellan Summation Index is simply the daily
running total of the McClellan Oscillator readings. Standard bearish divergence
between the NYSE index and the McClellan Summation Index is seen in the period
between February and July of 2011. We also notice historically overbought and
oversold levels in the McClellan oscillator coinciding perfectly with the troughs
in the McClellan Summation Index, which pinpointed the bottoms in the market.
It is important to point out that it is much better to identify the actual histori-
cal overbought and oversold levels in an oscillator that is relevant to the current
market behavior instead of relying on popular preconceived levels of overbought
and oversold.