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MCCLELLAN SUMMATION INDEX



You are here: ChartSchool » Market Indicators » McClellan Summation Index


MCCLELLAN SUMMATION INDEX




INTRODUCTION

Developed by Sherman and Marian McClellan, the McClellan Summation Index is a
breadth indicator derived from the McClellan Oscillator, which is a breadth
indicator based on Net Advances (advancing issues less declining issues). The
Summation Index is simply a running total of the McClellan Oscillator values.
Even though it is called a Summation Index, the indicator is really an
oscillator that fluctuates above and below the zero line. As such, signals can
be derived from bullish/bearish divergences, directional movement and centerline
crossovers. A moving average can also be applied to identify upturns and
downturns.


CALCULATION

Previous day's Summation Index* + current day McClellan Oscillator

* The very first Summation Index is simply the value of the McClellan Oscillator.



StockCharts.com provides two options for the McClellan Summation Index:
unadjusted and ratio-adjusted. Net Advances is the base indicator used to
calculate the McClellan Oscillator (and, by extension, the Summation Index); it
is derived from the number of advancing issues less the number of declining
issues. This number is used to calculate the “traditional” Summation Index.
Ratio-adjusted Net Advances equals Net Advances divided by advances plus
declines. This shows Net Advances relative to the total, which makes it possible
to compare values over a long period of time. This article focuses on the
Ratio-adjusted Summation Index. See the McClellan Oscillator article for more
details on ratio-adjusted Net Advances.


INTERPRETATION

The Summation Index rises when the McClellan Oscillator is positive and falls
when the McClellan Oscillator is negative. Extended positive numbers in the
McClellan Oscillator cause the Summation Index to trend higher. Conversely,
extended negative readings cause the Summation Index to trend lower.

Because of its cumulative nature, the Summation Index is a slower version of the
McClellan Oscillator. The index crosses the zero line fewer times, forms
divergences less often and produces fewer signals in general. Whereas the
McClellan Oscillator can be used for short-term and medium-term timing, the
Summation Index is generally used for medium-term and long-term timing.

There are three basic signals. First, the Summation Index generally favors the
bulls when positive and the bears when negative. Second, chartists can look for
bullish and bearish divergences to anticipate reversals. Third, chartists can
identify directional movement to define a bullish or bearish bias.


NASDAQ NEGATIVE BIAS

Before looking at specific signals, note that the Nasdaq Summation Index has a
long-term downward bias. This is because the Nasdaq AD Line also has a long-term
downward bias. This bias stems from listing requirements that are not as
stringent as NYSE. The Nasdaq is full of upstarts in industries ranging from
biotech to technology to alternative energy. There may be big upside potential,
but there is also a risk of absolute failure and delisting. Stocks trend lower
as failure becomes an option. Companies that fail are ultimately removed from
the index, but their negative effect on these breadth indicators remains.





This negative bias does not affect short-term or medium-term movements, but it
is clearly visible on long-term charts. The charts above show the Nasdaq
Summation Index ($NASI) and the NYSE Summation Index ($NYSI) from August 2002
until August 2010 (eight years). Notice how the Nasdaq moved higher from 2003
until 2007. Despite a multi-year uptrend in the Nasdaq, the Nasdaq Summation
Index spent more time in negative territory and the Nasdaq AD Line trended
lower. The NY Composite also moved higher from 2003 until 2007. In contrast to
the Nasdaq version, the NYSE Summation Index spent more time in positive
territory and the NYSE AD Line trended higher the entire time (green trend
line).


POSITIVE VS. NEGATIVE

Like many momentum oscillators, the Summation Index provides a bullish or
bearish bias when it is above or below its center line (zero). This is logical
because the glass is half full when positive and half empty when negative. The
Summation Index will be positive when the McClellan Oscillator has been largely
positive for an extended period of time. It takes more than one
positive/negative reading to push the Summation Index into positive/negative
territory. In fact, it usually takes several positive readings to push the
Summation Index into positive territory and keep it in positive territory. This
is why the Summation Index is better suited for medium-term or long-term
analysis.

The chart below shows the NYSE Summation Index with the NY Composite. The red
highlights show when the indicator moved into negative territory and remained
negative. Sustained negative values from June to December 2008 coincided with an
extended downtrend in the NY Composite. Conversely, extended positive values
from April to May 2009 coincided with a sustained uptrend in the NY Composite.
Like ALL indicators, the Summation Index is not perfect. There will be whipsaws
or periods when zero line crossovers do not last long.



Chartists can also tweak the positive and negative values required for a bullish
or bearish bias. The next chart shows the same time period for the NYSE
Summation Index and NY Composite. Instead of the zero line, the bullish
threshold is set at +500 and the bearish threshold is set at -500. A long-term
bull signal is triggered when the Summation Index moves above +500 and remains
valid until the index moves below -500. Similarly, a long-term bear signal is
triggered when the Summation Index moves below -500 and remains valid until the
index moves above +500. Instead of 10 signals in three years using the zero
cross, there were only two signals using the +500/-500 cross. The Summation
Index captured the long downtrend from August 2008 until April 2009 and the long
uptrend from April 2009 until July 2010 (and counting). Notice how the area
between 300 and 500 acted as resistance in 2007 and 2008 (blue arrows).
Similarly, the -300 to -500 area acted as support in June 2010.




DIRECTIONAL MOVEMENT

A moving average can be applied to the Summation Index to identify upturns and
downturns. The length of the moving average depends on your trading or investing
style and timeframe. A short moving average (5-days) will generate quicker
signals, but there will be more whipsaws. A longer moving average (20-days) will
lag a bit and there will be fewer whipsaws. It is the eternal tradeoff in
technical analysis. More speed means more whipsaws. Less speed reduces whipsaws
at the expense of later entries.

The chart below shows the NYSE Summation Index with a 20-day SMA (pink). Even
with this medium-term moving average, there are still plenty of signals and
turns. Some signals were great, some were not and some produced whipsaws. The
orange areas highlight whipsaws when there were three moving average crosses
within a relatively short timeframe.




DIVERGENCES

Bullish and bearish divergences in the Summation Index can help foreshadow
reversals in the underlying index. However, not all divergences result in
reversals or extended moves. The key, as always, is to separate robust
divergences from weak divergences. A bullish divergence occurs when the
Summation Index forms a higher low and the index forms a lower low. Even though
the underlying index moved to new lows, the higher low in the Summation Index
shows improving breadth. A bearish divergence forms when the Summation Index
records a lower high and the index forges a higher high. Even though the
underlying index moved to a new high, the Summation Index failed to exceed its
prior high and showed deteriorating breadth.

Chartists should attempt to differentiate between small insignificant
divergences and larger robust divergences. In addition, bearish divergences in a
strong uptrend are more likely to fail - as are bullish divergences in a strong
downtrend. Shallow divergences that form over a few weeks are more suspect than
steep divergences that form over 1-4 months.

The chart below shows the Nasdaq Summation Index with the Nasdaq. There were
three bullish divergences in the first half of the chart and four bearish
divergences in the second half. A 20-day SMA was added to confirm a subsequent
movement in the direction of the divergences. For example, the vertical green
lines show the Summation Index moving above the 20-day SMA after a bullish
divergence. Except for the last bullish divergence, the bearish divergences were
steeper and covered longer timeframes. Also, notice that the bullish divergences
occurred during a strong uptrend. These divergences did hint at short pullbacks
within this uptrend, but they did not foreshadow an extended decline or a major
reversal.




CONCLUSIONS

While the McClellan Oscillator puts a little momentum into the AD Line, the
Summation Index takes a little out by slowing down the oscillator. The Summation
Index is also quite a few steps removed from the original indicator, which is
Net Advances. In other words, it takes three separate calculations to produce
Summation Index values. The first derivatives (steps) are the 19-day EMA of Net
Advances and 39-day EMA of Net Advances. The second derivative is the McClellan
Oscillator, which is the 19-day EMA of Net Advances less the 39-day EMA of Net
Advances. The third derivative is the Summation Index, which is a cumulative
McClellan Oscillator. Each additional calculation changes Net Advances from its
original form. This is not always bad, but chartists should keep this in mind
when comparing the Summation Index with the corresponding index, the Nasdaq or
the NY Composite. As with all indicators, Summation Index signals should be
confirmed with other indicators or technical analysis techniques.


SHARPCHARTS

SharpCharts users can plot the Ratio-Adjusted Summation Index for the NYSE
($NYSI) or the Nasdaq ($NASI). The traditional (unadjusted) Summation Index
symbols are $NYSIT and $NASIT, respectively. These indicators can be shown in
the main chart window or in indicator windows above and below. The example below
shows the Summation Index as a “line” plot in the main chart window with the
underlying index behind it. This makes it easy to compare turns in the indicator
with turns in the index. A 20-day SMA was added to the Summation Index to
identify turns. Click here for a live example.



The Summation Index was also added as an indicator using the “Histogram” format.
This makes it easy to identify crosses above and below the zero line. The
underlying index (Nasdaq) is also shown in the lower window for comparison.


−OUTLINE

 * McClellan Summation Index
   * Introduction
   * Calculation
   * Interpretation
   * Nasdaq Negative Bias
   * Positive vs. Negative
   * Directional Movement
   * Divergences
   * Conclusions
   * SharpCharts





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