Daily Commentary - Posted on Sunday, November 27, 2011, 10:06 PM GMT +1
The McClellan Oscillator (Adjusted)
During the last couple of sessions, major market indices refused to post at least one higher close (the S&P 500 has closed lower for the seventh session in a row now) although historical probabilities and odds were partly significantly tilt in favor of a short-term bounce.
Most of my surveys and stats were based on price and positive seasonalities (end of the year, Thanksgiving, …), but only one on volume (a third 90% down volume day during the trailing week, see Turning Negative Year-to-Date in November , still open).
Up to now I rarely took advantage of the (ratio adjusted, not using raw numbers) McClellan Oscillator & Summation Index because – from my perspective – using a 10% trend (19-day EMA) and a 5% trend (39-day EMA) may not account for short-term (over a couple of days only) extremes (spikes) in the ratio of advancing vs. declining issues (from my perspective, a 10% and a 5% trend are too close to each other), but may be advantageous in order to spot intermediate-term trend changes. But by adjusting the respective smoothing factors (a shorter one on the first trend/EMA to better account for short-term spikes, and a longer one on the second trend/EMA to account for the ongoing changes in the markets), I thought it could be helpful to add an respectively ‘adjusted’ McClellan Oscillator to my arsenal of stock market indicators.
I choose a 20.00% trend (9-day EMA) and a 4% trend (49-day EMA), expanding the trend ratio from 2 (10% vs. 5%) to 5 (20% vs. 4%).
With respect to the (ratio) ‘adjusted‘ McClellan Oscillator (20.00% trend, 4% trend), the market hit a near-record low on November 23, 2011, the session immediately preceding Thanksgiving holiday (-287.86). Since 1940, there have been only 28 occurrences where the ‘adjusted‘ McClellan Oscillator closed at a lower level, e.g. October 16, 1987, the session immediately preceding Black Monday (therefore being in ‘good company’). Fortunately history did not repeat itself on Friday, November 25, 2011.
Table I below shows the S&P 500 returns over the course of the then following 1 to 3 sessions and the number of sessions until the S&P 500 posted its first close above | below the trigger day’s close (if any) for those occurrences where the ‘adjusted‘ McClellan Oscillator closed at the same or at a lower level than on November 23, 2011.
Except for 1941 (World War II), 1978 (Vietnam attacked Cambodia) and 1987 (stock market crash, Black Monday), the S&P 500 posted at least one higher close over the course of the then following three sessions (in this event until Tuesday, November 29) – even during the financial crisis in 2008 – , and closed at a higher level three sessions later on 23 out of 28 occurrences (closing lower during World War II, in 1978 and 1987 only).
Let’s see which company 2011 is looking for …
Have a profitable week,
Disclosure: No position in the securities mentioned in this post at time of writing.
Remarks: Due to their conceptual scope – and if not explicitly stated otherwise – , all models/setups/strategies do not account for slippage, fees and transaction costs, do not account for return on cash and/or interest on margin, do not use position sizing (e.g. Kelly, optimal f) – they’re always ‘all in‘ – , do not use leverage (e.g. leveraged ETFs), do not utilize any kind of abnormal market filter (e.g. during market phases with extremely elevated volatility), do not use intraday buy/sell stops (end-of-day prices only), and models/setups/strategies are not ‘adaptive‘ (do not adjust to the ongoing changes in market conditions like bull and bear markets).
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