﻿ McClellan Summation Index

# McClellan Summation Index

The McClellan Summation Index is a market breadth indicator derived from the McClellan Oscillator Index. Active traders use the McClellan Index to help them identify short-term buy and sell points. Due to the way the McClellan Summation Index is calculated, it is more suitable for longer-term investors as it helps to identify changes from a bear market to a bull market and bull markets to a bear market.

### McClellan Summation Index Calculation

When the McClellan’s first developed the Summation Index in the 1960’s it was calculated manually. Some people had problems subtracting a negative number from a negative number, so they made 1,000 the neutral level rather than zero. Over time, the calculation was changed to become ratio adjusted so it could incorporate the growing number of companies listed on the exchanges. At the same time many adapted the as the neutral level.

The ratio-adjusted Summation Index used by StockCharts other technical is calculated. Starting out, the basic input for the ratio-adjusted version is no longer the daily advances minus declines. The steps for the calculation are:

2. Divide the result by the total of advances plus declines; and
3. Multiple the result by 1,000, which removes the need for decimals.

This change moves the neutral level from 1,000 to the zero line. This formula gives the index a wide range of values. In effect, we are mathematically pretending that there are always exactly 1000 stocks trading. As such, it is better for multi-year comparisons. Like other technical indexes, extreme readings provide the best signals.

### McClellan Summation Index Buy and Sell Signals

The McClellan Summation Index tends to fluctuate between -2,000 and 2,000. However, it can move above and below this range during extreme market conditions. As a result, the Summation Index provides a good overview of the strength and weakness of the market, making it a good indicator to identify market turning points. When the Summation Index is in an uptrend, it indicates that the bulls are stronger than the bears. In a downtrend, it communicates just the opposite.

Major highs in the market take place when the index is above 1,500. Should the index rise above 2,000 it is a sign of an extreme over bought situation. Major lows in the market tend to take place when the index falls below -1,500. Falling to -2,000 or further is an indication of an extremely over sold condition.

One of the advantages of the McClellan Summation Index is it offers you an early signal of a change in the direction of the market. When the index reaches a low point and turns up it is considered a good sign that the market has reached a low point and will trend up. This reversal of the trend is one of the primary signals to observe when use the McClellan Summation Index.

For example, starting in the middle of 2005 and lasting through the middle of 2007, the index turned up after reaching or coming close to the -1,000 level. In each case, this signaled the multi-month down trend in the NASDAQ was over and a new rally was underway.

In late 2007, the McClellan Summation Index showed negative divergence as it presented lower highs throughout 2008, while the NASDAQ continues to rise. In this case, the McClellan Summation Index foretold the plunge in the markets that began in late 2008.

During the first half of 2008, the McClellan Summation Index reached highs of -200, a sign that the market remained weak. Then in late 2008, the McClellan Summation Index fell to below -1,600 an indication the market would turn up in the next few months, which it did starting in March 2009.

The McClellan Summation Index works well to help investors identify important turning points in the market. I find that the daily, weekly and the monthly time frames work well, depending on the perspective you wish to take. As with all indicators, it is best to gain confirmation from others to improve your decision-making. One of the positives of the McClellan Summation Index is it can provide an early signal of a trend change.