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The McClellan Summation Index – Bullish or Bearish

Joanna Kong
Yahoo Finance Premium

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Market breadth remains supportive of higher stock prices despite lackluster price action. The "steady as she goes" advance/decline (AD) lines are all at or near all-time highs. These include the S&P 500, the NYSE common-stock only, the S&P 400 MidCap and the S&P 600 SmallCap (SML) AD lines. All these lines continue to lead price, which is generally bullish for future returns. The McClellan Summation Index is derived from the McClellan Oscillator, which is a breadth indicator based on net advances on the NYSE Composite. The summation index is simply a running total of the oscillator values. At Friday's close, the summation index stood at a bullish +782 and above its eight-week exponential moving average.

There are many ways to read this indicator, including its absolute level, its direction, centerline crossovers (0), and bullish and bearish divergences. The index cycled from an extreme oversold at the end of '18 to an extreme overbought in February. That type of "breadth thrust" is considered bullish for at least the intermediate term. Since Feb., the index has pulled back between 230 and 800, bullishly staying above zero. Bearish divergences generally are seen at I.T./L.T. tops and can take months/year(s) to play out depending on the size of the top. The index is rising, above key averages, and not showing bearish divergences -- suggesting further upside in the NYSE and the overall market. The S&P 500 Bullish Percent Index (percent of stocks on point-and-figure buy signals) has rebounded to a bullish level of 69% from 46% in August.

Advance Auto Parts (AAP)

Advance Auto Parts is a leading retailer of auto parts in the U.S. AAP operated 5,901 stores and branches at the end of 2018, serving both the do-it-yourself and the professional installer markets under the Advance Auto Parts, Carquest, World Pac and Autopart Int’l. nameplates. Stores are in 49 states and Canada.

AAP is a technical turnaround play, recovering from a decline from $181 in April to $130 in August. It appears the stock turned the corner on August 13, following quarterly EPS results. The shares have almost recovered 61.8% (to $162) of the major loss this year, a typical Fibonacci retracement. There is chart resistance in the $163 area, so the stock is in a key region. The rally Monday recaptured the 200-day average for the first time since May. If the stock can take resistance at $163, AAP could head back to its intermediate range in the low $180’s.

Support sits near $150 and we would put a stop-loss just below that area. We would take profits in the $180 region after $163 (discussed above) is addressed.

First Solar (FSLR)

First Solar designs and makes a line of thin-film semiconductor photovoltaic (PV) cells and modules that convert sunlight into electricity. Products are based on cadmium telluride technology, and are used to provide reliable and environmentally friendly electric power.

FSLR is tracing out a bullish cup between $59 and $69. Volume has increased on the right or rising side of the pattern, a sign of institutional accumulation. During the cup, the shares lost their 50- day but did find support from their 21-week exponential moving average. A strong break above the top of the recent range at $69 opens the door for a possible measured move to the high $70’s/low $80’s area, where there is a large amount of resistance from the peaks in 2014, 2016 and 2018. According to Investors.com, FSLR has very high Relative Strength (RS) and Group RS ratings, and high Composite and Accumulation/Distribution ratings.

We would put a stop-loss just below support at $62. We would take profits in the high $70’s region once near-term resistance at $69 is overcome.

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