Developed by Sherman and Marian McClellan, the McClellan Oscillator is based on the smoothed difference between the number of advancing and declining issues on the New York Stock Exchange.

Similar to MACD, the McClellan Oscillator is a breadth indicator that uses advances and declines to determine the amount of participation in the movement of the stock market. One sign of a healthy bull market is a large number of stocks making moderate upward advances in price. A small number of stocks making large advances in price is a sign of a weakening bull market. This situation gives the false appearance that all is well and is the type of divergence that often signals an end to a bull market.

The oscillator fluctuates around a zero line usually ranging between +100 to-100. A McClellan Oscillator reading between +70 to +100 which then turns down is an overbought or sell signal. Buy signals are when the oscillator falls into the oversold area of -70 to -100 and then turns up. Any reading that goes beyond these areas (rising above +100 or falling below -100) is a sign of an extremely overbought or oversold condition. These extreme readings are usually a sign of a continuation of the current trend. Crossings above and below the zero line can also interpreted as short to intermediate term buying and selling signals respectively.

The McClellan Oscillator is calculated taking the difference between 10% (approximately 19-day) and 5% (approximately 39-day) Exponential Moving Averages of advancing minus declining issues:

(10% EMA Advances - Declines) - (5% EMA Advances - Declines)

Information provided by John Murphy, author of Technical Analysis of the Financial Markets and The Visual Investor.