Chart of the Week: NASDAQ McClellan Oscillator
We’re gonna be focusing on something a little bit different than we normally do. This isn’t a particular name that you can buy options or a stock in. Rather, it’s an indicator that tells us a little about what’s happening currently in the markets, and it can help give us clues on where to go. This is called NAMOT, which is the Nasdaq McClellan Oscillator.
This indicator tracks breadth
Now, the McClellan Oscillator simply looks at breadth in the markets – up issues versus down issues – and rates it with a score based on certain moving averages. And the differential of those two moving averages gives us a score on the NAMOT. It’s an oscillator, so it moves up and down and straddles zero.
Basically, the theory is, on the oscillator, is when we reach high levels on the Nasdaq (for instance, say above 200 – 250), markets are getting a little overbought. And it’s time to turn around and do some selling. At least look for a short-term correction.
Now, on the other hand, when we hit these low levels down here – around -250, -300 – we get into an area that is deeply oversold. And it’s time possibly to turn around and start doing some buying if you haven’t already.
The oscillator moves up and down quickly
I want to show you where we’re at right now and where we were recently – and over the past couple of years – to put some context on where we are currently.
After a huge drop these past three days – between Thursday, Friday, and Monday (August 1, 2, and 5) – the oscillator has traveled in a huge way in a very, very short period of time. Actually, about a week and a half ago, we were up at near record levels – about 360 on the oscillator – on the positive side. So it’s time to turn around and go negative.
And it didn’t take long to get down to -300. So plus 360 to -320. You can see how quickly this oscillator can turn. You can see back in the early part of January of 2023, we were up in the high 300s range. And in just a matter of weeks, we went down to the -300 range.
Go back to 2022, when we were in the throes of that bear market. Lots and lots of moves up and down from overbought to oversold. We were overbought here – over 300 here back in April and also in June, and then we quickly made moves down.
Extreme conditions don’t last long
These conditions don’t last at the extremes. That’s the point I want to make to you. They don’t last very long at the extremes. So, we’re at an extreme level right now. So we can probably look to this oscillator to start turning right back up.
When we are at these levels, you can notably see that anywhere from -250 to -300, almost every single time it moves right back up again.
So how does this indicator act like this? Because it gets to extreme levels on buying and selling, especially when we get to the downside, like we are right now. Think about a rubber band that gets stretched all the way back, as far as you can take it. And then you let it go, and it just snaps. That’s what’s happening here when we reach these extreme levels – it snaps (also to the upside as well).
But I did want to draw your attention one more time to this four-year chart – 2021, 2022, 2023, and 2024. Far more negative readings on the NAMOT than there are on the positive side – above 250. One, two, three, four, five six; where we have five, six, seven, eight, nine, ten, eleven, twelve mirrored that on the other side to the negative.
The Mag 7 stocks affect the Nasdaq McClellan Oscillator
So it just tells you that when the Nasdaq is selling off, there is a lot of volume coming in. There’s a lot of breadth, there’s a lot of issues that are skewed to the downside versus the upside. It kinda makes sense right? Over, the past couple of years, we’ve had what’s called the Mag 7 stocks – and all those are Nasdaq stocks. So when the Nasdaq Mag 7 has been performing well but the rest of the market has not, you get these huge negative readings in the NAMOT – the Nasdaq McClellan Oscillator.
Hopefully that is something useful for you to learn about – the Nasdaq Oscillator.
There’s also the NYMOT, which is the NY Stock Exchange McClellan Oscillator, which is also a useful tool. It’s also at an oversold reading, too, right now.
But we should look for a little bit of a pull up here in the next few days. We’re not going to try to time it, but if you look at history – certainly the last nine or ten times when we’ve reached these extreme oversold levels – the market has bounced back. Hopefully that’s a good lesson for you.
Don’t miss a single one of Bob’s charts! Get the Chart of the Week in your inbox every week!
