When the McClellan A-D Summation Index makes a big move in a short amount of time, that action contains important information. This week, I’ll show a pair of charts that help to make this point.
The Summation Index changes each day by the value of the McClellan Oscillator. My mother Marian McClellan was a math major in the 1950s, when it was a lot less fashionable for women to undertake that avenue of study than it thankfully is today. Back in the 1950s, they did not typically teach integral calculus in high school where most of us learned it, but she studied it at Pomoma College. And as a result, she knew about the importance of integrating the “area under the curve”. So when my parents in 1969 were first studying the indicator that came to be known as the McClellan Oscillator, my mother quickly realized that there was a derivative indicator that they needed to also study, an indicator that came to be known as the Summation Index.
We have written a lot about the Summation Index over the years, including in this series of articles, and it continues to be an essential part of our analysis toolbox. One of the less-studied aspects of Summation Index behavior involves the meaning of rapid changes in the Summation Index’s value. Since the Summation Index changes each day by the value of the McClellan Oscillator, a Summation Index N-day rate of change is another way of referring to a N-day total McClellan Oscillator of values.
The chart above looks at the 50-day rate of change (ROC) in the Summation Index. It simply compares today’s value to that of 50 trading days ago. Mathematically, it is another way of quantifying the total of the last 50 trading days’ McClellan Oscillator values. When it gets to a deeply negative value, it indicates a longer term oversold condition for the market, one which is difficult to sustain past a certain point. When this indicator turns back up again, the message is that the big oversold condition is waning, and a rebound period is getting started. That is the condition in which we find ourselves now.
A similar indicator is shown below, this time looking at the 10-day ROC. For some reason, 50 days and 10 days make for meaningful lookback periods. Perhaps there are others, and perhaps the magic lies in tapping into an organic market cycle length. Whatever the explanation, it seems to work.
A single day with a really low McClellan Oscillator value is a sign of an oversold condition. Having 10 days’ worth is a different sort of message about the state of the market. Such low readings do not come along all that often, perhaps once or twice a year. Finding a twice a year oversold condition is a pretty interesting bit of market insight, and one worth listening to.
The McClellan Market Report