Trader’s Narrative

The McClellan Summation Index, is a very useful guide for longer term trends. When it is in an uptrend, we know that there is a lot of money flowing into stocks. And when it is in a downtrend, we know that sellers have the upper hand.

Other than that, it also gives important signals when it reaches either positive or negative extremes (usually +/- ~1000). I also like to apply the usual technical pattern analysis to it. I wrote about the McClellan’s coiling pattern last summer and the ominous message it had if it did indeed break down.

As we now know, that was a great signal just before the stock market took a tumble into August 2007 - where the Summation Index got crushed all the way to -900 (see chart below).

The technical damage we’ve seen has been pretty extraordinary with the most recent decline. So much so that the McClellan index is now at levels only exceeded in 2002 when we had a vicious bear market:

If the market retests the January lows, then it would be useful to watch the Summation Index to check if it stays above its recent low. A positive divergence would mean that even though the Nasdaq index is once again reaching lows, the underlying components have a much stronger technical position and so, we would have a high probability of making a double bottom.