Daily Commentary - Posted on Sunday, November 27, 2011, 10:06 PM GMT +1

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Nov Sunday 27

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,

Frank

Disclosure: No position in the securities mentioned in this post at time of writing.

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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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Disclaimer

The information on this site is provided for statistical and informational purposes only. Nothing herein should be interpreted or regarded as personalized investment advice or to state or imply that past results are an indication of future performance. The author of this website is not a licensed financial advisor and will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on the content of this website(s). Under no circumstances does this information represent an advice or recommendation to buy, sell or hold any security.

I may or may not hold positions for myself, my family and/or clients in the securities mentioned here. Actions may have been taken before or after information is presented, and any opinions expressed in this site are subject to change without notice.

(Data courtesy of MetaStock , and for data import, testing, surveys and statistics I use MATLAB from MathWorks)

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