Technical Indicators: M (part 2)
Mass Index
The Mass Index was developed by Donald Dorsey to identify trend reversals by using the changes of daily price ranges to identify reversals in trends. As the price ranges narrow, the Mass Index decreases. As the price ranges widen, the Mass Index increases.
A significant pattern to watch for is the "reversal bulge." These occur when on a 25-period plot the Mass Index surpasses 27 then falls past 26.5.
A 9-period Exponential Moving Average of prices is often used to determine if the reversal bulge indicates a buying or selling. If a reversal bulge occurs, buy if the moving average is trending down (in anticipation of the reversal) and sell if it is trending up.
McClellan Oscillator
Developed by Sherman and Marian McClellan, the McClellan Oscillator is based on the smoothed difference between the number of advancing and declining issues on the New York Stock Exchange.
Similar to MACD, the McClellan Oscillator is a breadth indicator that uses advances and declines to determine the amount of participation in the movement of the stock market. One sign of a healthy bull market is a large number of stocks making moderate upward advances in price. A small number of stocks making large advances in price is a sign of a weakening bull market. This situation gives the false appearance that all is well and is the type of divergence that often signals an end to a bull market.
The oscillator fluctuates around a zero line usually ranging between +100 to-100. A McClellan Oscillator reading between +70 to +100 which then turns down is an overbought or sell signal. Buy signals are when the oscillator falls into the oversold area of -70 to -100 and then turns up. Any reading that goes beyond these areas (rising above +100 or falling below -100) is a sign of an extremely overbought or oversold condition. These extreme readings are usually a sign of a continuation of the current trend. Crossings above and below the zero line can also interpreted as short to intermediate term buying and selling signals respectively.
The McClellan Oscillator is calculated taking the difference between 10% (approximately 19-day) and 5% (approximately 39-day) Exponential Moving Averages of advancing minus declining issues:
(10% EMA Advances - Declines) - (5% EMA Advances - Declines)
McClellan Summation
The McClellan Summation index is a market breath indicator based on the McClellan Oscillator and was developed by Sherman and Marian McClellan.
The interpretation of the McClellan Summation is similar to that of the McClellan Oscillator except that it is more suited to major trend reversals as it is a long-term version of the Oscillator.
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The McClellans suggest the following rules for use with the Summation:
- Look for major bottoms when the McClellan Summation drops under -1,300.
- Look for major tops to occur when a divergence with the market occurs above a level of +1,600.
- The beginning of a significant bull market is indicated when the McClellan Summation crosses above +1,900 after moving upward more than 3,600 points from its prior low.
Median Price
The Median Price function calculates the midpoint between the high and low prices for the day. Sometimes also referred to as the mean or average price.
As with other price adjustment functions, the median price provides a simplified view of the trading prices for the day. It can be used to smooth out some of the volatility of the closing price since it includes information for the entire trading day rather than specifically the end of the day.
The median price can be used anywhere a closing price or other single price field would be used.
Mesa Sine Wave
Developed by John Elhers, the Mesa Sine Wave utilizes two sine plots to illustrate if the market is a cycle mode or in a trend mode. When the two plots resemble a Sine wave the market is in cycling mode. When the plots start to wander the market is said to be in a trend mode. In a trend mode the Sine and Lead Sine plots typically languish in a sideways pattern near zero, running parallel and distant from each other.
One useful attribute of the MESA Sine Wave indicator is that it will anticipate cycle mode turning points rather than waiting for confirmation as is seen with most other oscillators. The indicator has the additional advantage that trend mode whipsaw signals are minimized.
The indicator consists of two plots - one line displaying the Sine of the measured phase angle over time and the other the Sine of the phase angle advanced by 45 degrees (the Lead Sine). Together the crossings of the Sine and Lead Sine give clear advanced indication of cycle mode turning points.
When the market is in cycle mode, a buy signal is given as the Sine plot crosses above the Lead Sine plot. The sell signal is given when the Sine plot crosses below the Lead Sine plot.
When the market is in the trend mode, trade the trend. Basic moving average crossovers may be useful for entering and exiting positions in this type of market.
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