McClellan Oscillator Back in Channel After False Break
In our last post we had seen McClellan Oscillator in channelled move and had stated that we are not sure if the Index is up for a deep correction or it is just a temporary retracement. It does not matter what stream of analysis one follows. The important part is that one needs to understand the pros and cons of the Technical Analysis Tools and Indicators that one uses.
McClellan Oscillator, like all other oscillators, can keep oscillating within a narrow range of 20 to 40 or -10 to -30 or 30-45 or -15 to -50 and so on. Though the normal tendency of McCllellan Oscillator is that it travels from one extreme to another from -60/-80 to +60/+80 and back most of the times. Having said that, it is not a compulsion or a defined rule that it does so. The normal tendency catches the eye of people and to add spice to the analysis we can add bands and averages and all sort of indicators above it and once it works then we can ink our names in the Guinness book of world records. It sounds so cool but the smart money is always looking for the over smart sheep to hunt their prey. If it was just about trading it between precise levels then we can design a simple algorithm that if the price of Nifty is XXXX and MO is YYYY & if XXXX > ZZZZ and YYYY > WWWW = Buy or if opposite then Sell. But things aren’t so straight forward as they seem to be. The fancy of precision of the behaviour of price or indicators is what kills many traders.
For example, if we compare the recent move in $NIFTY and the McClellan Oscillator when $Nifty fell on the September Expiry day then the MO just broke down below the channel discussed in the previous post. The very next day it fell back in the channel. These false breaks are very important as that is where the smart money is sitting take the donation in their huge donation boxes. So let us have a look at the chart to see what happened.
In the above chart, we can see that the $NIFTY broke down from the long-term median Line and the McClellan Oscillator made a lower high within the rising channel. A preliminary sign of weakness was visible in such behaviour. The visual support is obviously the long term lower trend line of the rising channel and it was important to see the reaction of price as well as the Oscillator at that point. Surprisingly, the McClellan Oscillator snapped back into the channel the very next day after breaking the channel and the price is still within the channel.
We need to see how McCllelan Oscillator which is at 0.08 right now behaves in the next week in correspondence to price. If the Oscillator stays within the channel and price start going too far up or down we need to reanalyze the situation but if the Oscillator breaks the channel again along with the price then it can be considered as a deeper correction in place. On the contrary, if price snaps back above the median line and the oscillator stay in the channel then a time correction might happen with a range bound price movement. Price and Oscillator both breaking out would resume uptrend and can go above the recent swing high.