The chart which i posted in my previous post was indeed the NYMO advance-decline chart, specifically used to calculate overbought and oversold conditions on the NYSE ( New York stock exchange).
We are not trading on the NYSE, but actually the NSE and the only change in the formula has been the values of the NSE as opposed to the NYSE.More recently the NYMO was at a -80 levels on the NYSE with the futures at 1171, before a 36 point move began to 1207 there.
But make no mistake, the indicator is as powerful on the NSE as it has been on the NYSE.You can read more about the NYMO or the Mcclellan indicator here
The McClellan Oscilator is amongst the best reversal indicators in the market today as it measures extreme bullishness or bearishness in sentiment through the advance-decline ratio which in itself is the best gauge of market sentiment.It works well for all contrarians.
Here is the chart updated from the beginning of 2010.
Notice the lows of the Mcclellan marked by swing lows on the Nifty.
There are two ways to play the McClellan indicator.
The first one is to be on the lookout for extreme readings of -80 to +80 at the close of the day session. Here existing positions can be closed or new contrary positions can be initiated for a swing trade.
The second and more powerful use of the McClellan is when it sets up a divergence with price.In february of 2010 we had one such divergence which ended the correction at 4675 for a move to 5300 which came in the first week of April.The indicator hit a low of -135 on 6th feb whilst price hit 4675 on the 8th of feb.
We are at similar levels of the McClellan, but without a price divergence at the moment. Regardless, the indicator is getting extremely oversold which means you have to be cautious if you are trading short.The risk-reward does not favor new shorts at the moment.
To close let’s look at what the oscillator did in the crash of 2008.The chart below is computed from 1st dec 2007 to 31st March 2008.
The difference is that in 2008 the NYMO was reacting to a crash and we are having a correction at the moment.
A good correction runs between 10-13 % and generally finishes the daily cycle at it’s lows.I’m still expecting the new daily cycle which is overdue for a beginning to take us to swing highs by early next year before we can think about an intermediate degree correction.