Q: What do I make of an upward trending summation index? I don't understand what it means and how to use it. Would you kindly explain?

Before proceeding to the McClellan Summation Index, it is important to understand the dynamics of the McClellan Oscillator.

The McClellan Oscillator is a breadth indicator derived from each day's net advances (the number of advancing issues less the number of declining issues). Subtracting the 19-day exponential moving average from the 39-day exponential moving average of net advances forms the oscillator.

Similar to MACD, the McClellan Oscillator is a momentum indicator that is applied to the advance/decline statistics. When the 19-day EMA (shorter moving average) moves above the 39-day EMA (longer moving average), it signals that advances are gaining the upper hand. Conversely, when the 19-day EMA declines below the 39-day EMA, it signals that declining issues are dominant. As a momentum indicator, the McClellan Oscillator attempts to anticipate positive and negative changes in the AD statistics for market timing.

The McClellan Summation Index is the cumulative total of each day's reading for the McClellan Oscillator. The chart below displays the McClellan Oscillator as a histogram to easily identify each day's positive (addition) or negative (subtraction) effect on the McClellan Summation Index.

As the cumulative total of the McClellan Oscillator, the McClellan Summation Index oscillates above and below zero, but the fluctuations are smoother and zero line crossovers less frequent. This makes it better suited for longer-term strategies than the McClellan Oscillator. Usually, readings above +1600 are considered overbought and readings below -1300 oversold. Overbought and oversold readings may vary among indices and historical precedent. Major buy signals occur when a positive divergence forms from oversold readings and there is an advance into positive territory. Major sell signals occur when a negative divergence forms from overbought levels and there is a decline into negative territory. In addition, relatively sharp movements, greater than 3600 points from overbought to oversold extremes, indicate the beginning of a major move.

The chart above shows the McClellan Summation Index with the McClellan Oscillator as a histogram. Notice that the McClellan Oscillator turned negative in early March, but it was not until 4-April that the McClellan Summation Index broke below zero, generating a rather timely sell signal. The McClellan Summation Index declined from +2685 on 17-Feb to -2573 on 24-April, a total of 5258 points. Such a major move would seem to indicate that a bear market began. The index found some stability in May and formed a positive divergence in oversold territory. It began to advance towards the zero line in June, but has yet to cross into positive territory.

Cheers, Arthur Hill

Q: I missed your "Gap trading strategies" article by Scott McCormick, please let me know how could I search for it if it is still available?
Q: I must congratulate you to that new indicator addition to SharpCharts. Would you have a short essay on its use that I cannot find on your site, like an explanation of what those small numbers signify?
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