The McClellan Summation Index is a breadth indicator derived from taking a cumulative summation of the McClellan Oscillator, which is a comparison of advancing issues vs. declining issues. In a healthy bull market the advancers vs. decliners should also be expanding in favor of the advancers, which will cause the McClellan Summation Index to rise.
If the market advances but the McClellan Summation Index declines then the advance is based on a weakening base of support. Also, if the market makes a higher high but the McClellan Summation Index makes a lower high then the second high was made with much weaker buying strength and is a sign of a potential pullback. This sort of divergence is common before a market pullback. The McClellan Summation Index is not just another twist on the price action, like so many other indicators, it is measuring market participation by the best stocks in the market (NYSE listed) which gives you excellent confirmation and advance warning of a change indirection.
It also works in reverse for market declines. See the examples below:
Chart 1 ends on 8/15/2013 and was made with MultiCharts. Chart 2 depicts the market bottom on 10/4/2011 and was made with TradeStation. These charts use daily data. The reaction time of weekly data is too slow and intra-day data does not provide reliable information.
The McClellan Summation Index is not part of every stock chart package but it is available on StockCharts.com ($NYSI) and you can contact us at firstname.lastname@example.org to request our custom code for MultiCharts and TradeStation (It is not a standard indicator on either one of those either).
Using only the McClellan Summation Index, I was able to have enough confidence at the recent double top high to buy a lot of put options on SPY at almost exactly the top.