Stock trading is a hobby for some people, but it is a career for many others. Day traders use a variety of tools to make decisions about when to buy or sell, and what to trade. One of these tools is the McClellan Summation Index.
This article will tell you everything you need to know about the McClellan Summation Index. We’ll touch on what it is, how to read it, what it tells you, and how to use it with your stock trading.
What Is The McClellan Summation Index?
Let’s first define what the McClellan Summation Index is. Each day the market operates, finance publications will list the number of advances (stocks that closed higher than the day before) and declines (those that closed lower than the previous day). A figure called the “daily breadth” is the difference between these two numbers. These publications keep a running total of this figure, known as the “Daily Advance-Decline Line.”
McClellan Financial Publications takes that data and uses calculation known as an exponential moving average (EMA). Basically, they weight recent data more heavily than older data to try to smooth things out. They do two different calculations, and the difference between those numbers gives us the McClellan Oscillator. Typically, if that figure is positive, that means money is coming into the market. Conversely, if it reads negative, then that means money is leaving the market.
If you take the daily values of the McClellan Oscillator and add them all together, you get the McClellan Summation Index. Both indicators provide value and give us insight into how the market is performing and especially where it is heading.
How To Read the McClellan Summation Index
Now, it’s important to know how to read the McClellan Summation Index and understand what it’s saying. The indicator has been around since the 1960s, and some things have changed in terms of how to read the chart.
If it is properly calculated, a neutral report should read at the +1,000 level. Back in the 1960s, people had a hard time doing calculations with negative numbers. Because of this, they changed the indicator so that even a “negative” reading would still give a positive number. If the McClellan Summation Index is reading below 0, that indicates a pretty serious concern.
An important note is that the indicator is not price-based, but rather direction-based. This makes it a useful tool for gauging where the market is moving rather than simply where it is today.
What The McClellan Summation Index Indicates
The McClellan Summation Index, as said above, can tell us some really useful information about the direction of the market. Originally, the index would often stay between 0 and +2,000. It does, however, fluctuate a little more in the current market due to more instances of overbought and oversold conditions.
In general, when reading the index, there are a few basic things to watch out for, according to Investopedia:
- Watch out for bottoms below -1,300
- Watch for tops with a divergence above +1,600
- If you notice the McClellan Summation Index crossing above +1,900 after moving +3,600 points from its prior low, (e.g., the McClellan Summation Index moves from -1,550 to +1,950), this can indicate an upcoming bull run
Something else to keep in mind is that the McClellan Summation Index can tell us what kind of support the market has. If you see the market advancing but the McClellan Summation Index is declining, then that advance is based on a weakening support base.
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Also if you see the market makes a higher high, but the index is hitting lower, that can be a sign of a potential pullback due to weaker buying strength. Again, the McClellan Summation Index is not simply an indicator of price, but instead, it is measuring market participation. It can help give you advance warning of a change in direction.
How To Trade the McClellan Summation Index
If you want to become a full-time daytrader, things like the McClellan Summation Index can be a really helpful tool. In order to read them properly and track them you will also need a machine that can handle all that information.
You can find the right computers for trading the McClellan Summation Index at Falcon Trading Systems. Falcon specializes in machines built for trading stocks, and they offer both larger desktop setups and more portable mobile systems.
If money is no object, they have the best of the best on the market. They also more budget-friendly computers as well. Just make sure if you are going to try and make a career out of this that you have a computer that can handle the work you need to do.