The McClellan Oscillator is a very useful tool in chart analysis for spotting short term reversals and extremes in the market. Traders can use its signals to identify potential tops or bottoms in the market.
The McClellan Oscillator ranges from +100 to -100. Signals on the McClellan beyond the +80 or -80 level usually indicates market “extremes”. For example, a -80 reading means that either the stock market has reached a bottom or is near a bottom.
Take a look at the below chart of the McClellan Oscillator (top) and the S&P 500 stock market index (bottom):
For example notice that in November 2012, the McClellan went below -80 (shown in the first red circle) which coincided with the market bottom in that year. Conversely in September 2013 the McClellan Oscillator gave a +80 reading (shown as blue circle) which coincided with a top in stocks before they declined.
I like to use the McClellan Oscillator as an indication to when the market could bounce after a decline or sell-off. The McClellan can also throw some false signals too but this can be limited if you use some other technical analysis tools in combination with it.