Top Advisors Corner

Tom McClellan: Countertrend Rally or New Uptrend? RASI Holds The Key

Tom McClellan

Tom McClellan


“Gobs of breadth is a good thing.” That is one of my favorite sayings, and we seem to be getting it since the Dec. 24, 2018 bottom. 

When there are multiple days in a short period with really strong Advance-Decline (A-D) numbers, it is a sign of strong liquidity. It is possible to lift a few important stocks when liquidity is tight and the mood swings bullish.  But to lift the majority of stocks takes a much bigger firehose of money coming in. So when we see a lot of strong breadth numbers, that is a sign that the liquidity flow is healthy.

On Jan. 9, 2019, we saw the raw McClellan Oscillator get up to +354, which is close to the all-time high of +386 it made on Jan. 6, 2009. That all-time high was seen at the top of a countertrend rally, two months ahead of the final bottom. So just getting a really high McClellan Oscillator is not necessarily a sign that a new uptrend is starting.

But a high enough reading on the Ratio-Adjusted Summation Index (RASI) can be that sign. A corrective move will take prices down, and can take the RASI down close to zero or even below. The key, then, is to see the RASI rise up high enough to say that the new up move is strong and can achieve “escape velocity.”

The Summation Index changes each day by the value of the McClellan Oscillator. So, if the Oscillator is positive, the Summation Index moves up. If the Oscillator is negative, it moves down in increments equating to the value of the Oscillator. It is like integrating the area under the curve, if you can remember all the way back to high school calculus class. 

The Ratio-Adjusted Summation Index differs only in that it uses a slightly different calculation method which factors out the changes in the number of issues traded each day on the NYSE. See this article for an elaboration on all of that math. 

Whether one uses the raw (or classic) McClellan Oscillator or the Ratio-Adjusted McClellan Oscillator (RAMO), seeing a bunch of positive Oscillator readings means that the Summation Index (or RASI) moves higher. What we have found is that the +500 level is an important dividing line for the RASI in terms of giving a go/no-go signal about the new uptrend. When a rebound in the RASI occurs and it falls short of getting up to the +500 level, historically, that has meant trouble lies ahead. But zooming up well above +500 is a sign that there is a lot of strength behind the move, and the higher it goes above +500, the more emphatic the message of strength.

The RASI right now is at -122, but it is rising strongly and headed up toward that test of the +500 level. If we keep seeing gobs of positive breadth numbers every day, then getting the RASI up above +500 should be no problem. That was the message we got in the months after the March 2009 major bottom. But on several rally attempts before that March 2009 bottom, the RASI rallied up and failed short of the +500 level.

Failing shy of reaching +500 is a pretty good sign that there are liquidity problems for the stock market. So that will be an important point to watch out for in the days and weeks ahead. If the positive A-D numbers every day keep coming, then that will result in continued positive McClellan Oscillator readings and a continued rise in the Summation Index. 

If you want to watch the RASI for yourself to see how it does as it approaches the +500 level, you can follow it at this link: http://schrts.co/DhTEqfaT.

Tom McClellan,
Editor
The McClellan Market Report
www.mcoscillator.com