The advance/decline divergence oscillator (also called the McClellan Oscillator after its creators) tracks the rate of change in the advance-decline line (net advances). The AD line is formed from the Net Advances/Declines calculated daily at market close; this represents the proportion of stocks which advanced (increased) in price that day versus those which declined – the size of the difference is called the daily breadth. The advance/decline divergence oscillator can be applied to any group of stocks or exchange.
The McClellan Oscillator uses two Exponential Moving Averages (EMA) from the AD line and finds the difference between a 10% Smoothing Constant and a 5% Smoothing Constant for each day. These are called the 10% Trend and the 5% Trend, and they determine how much weight is given to more recent data as opposed to equal weighting regardless of date.
The numerical difference between these two lines becomes the McClellan Oscillator. The AD line is positive when there were more advances than declines, at zero when advances and declines were even, and in negative territory when there were more declines than advances.
The McClellan Summation Index – basically a moving average of the Oscillator – is another helpful tool for spotting overbought and oversold conditions for traders. The McClellan Summation Index is a cumulative measure that is useful for examining longer-term trends, while the McClellan oscillator functions better for short term analysis.
Market breadth is used in a slew of technical analysis techniques because it gives traders an idea of how an entire market is moving: by comparing the number of advancing issues to the number of declining issues, or new highs and new lows, traders see a bigger picture (and from a different viewpoint than just the numbers from the major stock market indexes).
Momentum is a large part of what advance/decline divergence and breadth are attempting to read, but on a market-wide scale instead of searching for trends in individual securities. Differences in these numbers over many days form a breadth line or advance/decline line.
Examining market breadth and using a McClellan Oscillator are popular trading techniques, but additional confirmation is always useful. Artificial intelligence tools from Tickeron are designed to assist traders with trade ideas, help analyze signals to execute advantageous trades, and aid traders in making rational, emotionless, and effective trading decisions in concert with other technical analysis techniques.