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27 December 2021
Investopedia said McClellan Summation Index (MCSI) is a long-term version of the McClellan Oscillator, which is a market breadth indicator based on stock advances and declines. But what does that really mean to a layman or a beginner in stock trading?
Some said the stock has speed and momentum. It may be easier for a layman to understand if we were to imagine MCSI or McClellan Oscillator is measuring the momentum of a stock. Therefore, if the stock momentum is strong, the stock prices can go very far; if not, it will stop moving forward and might even fall soon after. This article will discuss how we could use this MCSI index to understand the stock movement in the market.
What is the use of MCSI?
Simply said, MCSI is just a tool often used by Technical Analysts to predict the stock movements in the market. The stock market always consists of many different kinds of stocks and many different types of players. About 80% of the players are just small players; only the rest of the 20% are the big players. But, this 20% will always be the ones that move the market. In other words, using MCSI, one can roughly tell if the big players are involved and if the market indexes will be going up or going down.
What is this MCSI?
For those who are interested in the details, etc, please visit Investopedia. Meanwhile, we only need to know that they use the numbers of stocks moving up and moving down to work out the MCSI. The MCSI will "jump" when there is lots of stock moving up in the day and vice versa.
How Does it Work?
The following example shows the MCSI for DOW plotting in parallel to S&P. The MCSI is shown in the red/blue line with the scale on the right. The S&P is shown in blue line with the scale on the left
a) Point 1
This shows that the S&P index was moving in line with MCSI. Most likely the big players were in the market pushing up the S&P index.
b) Point 2
The S&P was still moving up but many big players had decided to quit after seeing the market had started to lose momentum. Technical Analysts will say they see a "divergence" between the MCSI and the S&P.
c) Point 3
The S&P hit a minor bottom and the big players resumed their plays with MCSI going above the last high. The buyup momentum was quite big and aroused many smaller players to join and continue to push the market up even though the big player had left the market.
d) Point 4
This last push to another high is obviously going without the help of the big players as there is no momentum at all in the buying up.
e) Point 5
Point 3 is repeated here. One could see some big players joined in at one stage when the market hit the bottom. But they decided to quit soon after, leaving the market to the smaller players again, propping up the market.
f) Point 6
The market has hit the major bottom.
g) Point 7
The market has hit the major top.
How to tell stock movement in 2022?
The stock movement is obviously badly hit by the Covid-19 Pandemic. Covid-19 has caused the market to slump in early 2020. The MCSI stopped short at around 1,000; thereafter, the market has an even play with S$P going up in line with MCSI. The big players then left the market around April 21, leaving the smaller ones pushing up the market. Again, we see a "divergence" between the MCSI and the S&P. We are now expecting to see bearish market moves in the coming days or weeks.
However, we might be disappointed this time to expect a crash in the market because MCSI has never been pushed into the major top region or above 1,400. One can therefore envisage that the big players might need a little more time to accumulate enough "bullets' to "send" the market to another major bottom.
Disclaimer: This article is for information and educational purposes. Readers are advised to conduct their own research and study to make their own investment decisions.
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