Skip to main content

Lesson 7: NASDAQ Summation

Developed by Sherman and Marian McClellan, the McClellan Summation Index is a breadth indicator derived the McClellan Oscillator, which is a breadth indicator based on Net Advances (advancing issues less declining issues).

The NASDAQ market is full of the more volatile stokes so it should react sooner then the other markets. The McClellan Oscillator $NAMO is in black and red on the bottom of the chart. 

The McClellan Oscillator red and black on the chart bottom is a breadth indicator derived from Net Advances, which is the number of advancing issues less the number of declining issues. Subtracting the 39-day exponential moving average of Net Advances from the 19-day exponential moving average of Net Advances forms the oscillator. As the formula reveals, the McClellan Oscillator is a momentum indicator that works similar to MACD. McClellan Oscillator signals can be generated with breadth thrusts, centerline crossovers and divergences. 

The Summation Index (green line top of chart) is simply a running total of the McClellan Oscillator values. Even though it is called a Summation Index, the indicator is really an oscillator that fluctuates above and below the zero line. As such, signals can be derived from bullish/bearish divergences, directional movement and center-line crossovers. A 5 day moving average (red) is applied to identify upturns and downturns.

The Summation Index rises when the McClellan Oscillator is positive and falls when the McClellan Oscillator is negative. Extended positive numbers in the McClellan Oscillator cause the Summation Index to trend higher. Conversely, extended negative readings cause the Summation Index to trend lower.
Because of its cumulative nature, the Summation Index is a slower version of the McClellan Oscillator. The index crosses the zero line fewer times, forms divergences less often and produces fewer signals in general. Whereas the McClellan Oscillator (bottom) can be used for short-term and medium-term timing, the Summation Index (top) is generally used for medium-term and long-term timing.

This chart can be very sensitive, and traders should be concerned when the red line is over the green, even if the NASDAQ market itself has not yet sold off. However that said this indicator is less than perfect, even with this medium-term moving average, there are still plenty of signals and turns. Some signals were great, some were not and some produced whipsaws. I would not trade this indicator on its own, but it does help provide a key confirming signal when used with the other market comment indicators. 

Popular posts from this blog

Lesson 2: How I View the Markets

In order to understand the point of the Market Comment, you really must understand what the author believes about the market. These I believe are the fundamental truths. More importantly, they are the creed of my investing philosophy. To put it another way, this is how I think it all works.

Basic Belief 1: The Stock Market is the Best Investment
Over the long run, you can make more money investing in the stock market than any other investment. There is a basic reason for this, business equals wealth. The largest economies in the world are the wealthiest and the crown jewel of the economy is production. Regardless if you make computer chips or potato chips, if you don't make things people want or need, you don't create wealth. Business pays all the employees, all the rent and in a way all the taxes. Therefore owning a business is the true source of wealth and the stock market lets you buy a slice of that.

Here is what $100 in 1926 would grow to:

Basic Belief 2: The Power of Co…

Lesson 1: The Bull and Bear Lines – for Phil

When I was living on an island in Belize I met a very amiable man who always had a warm smile a deep tan and a positive outlook on life his name was Phil. We were talking about investments one day and Phil had found a very good financial planner who took care of most of his modest investments. Like many other people I meet Phil does not want to learn to be a trader like me, he just wants a simple way to be sure his money is safe. Also like many people I meet, the 2008 financial meltdown really called into question if it is a safe bet to be in equities at this time. I explained to Phil that you can be safe in the markets if you set limits on when you are owning equities. So here we will discuss a very simple system for protecting your wealth from the worst pullbacks. If you follow this simple system anyone can out perform many mutual funds and still sleep well at night.

Yes I use this system myself, in fact the chart I am going to show you is always the first chart I look at when eval…

Lesson 9: Playing the Odds

So you want to know how I am trading and profitable after 30 years and many are not? Learning that sometimes thing work in the markets and that sometimes they don't but that's has NOTHING to do with good and bad trading. What counts is executing the high probability action.

Take a moment and contemplate this:
There is a sign in a collection agency it says;
"Winning is a just a matter of luck, ask any loser".

You see this in poker, sometimes you do the odds and realize you are probably up against a better hand and you fold. Sometimes it turns out you were bluffed and that hurts, but in the long run if you played correctly over many games you will overall win.  The poker hand pictured above is 7 2 off suit, general thought to be the worst hand in poker. However if per chance the community cards come up as 7 7 7 2 2 you have one of the most unbeatable hands possible.  Just because you won once playing 7 2 does not make it a good hand to play. In fact play it lon…