Commodity Channel Index

Founded on the idea that prices move in cycles of highs and lows, the Commodity Channel Index (CCI) seeks to identify these cyclical changes in prices. Though CCI was originally developed to use with commodities, today it's used to evaluate a much broader range of assets, including equities, bonds and currencies.

CCI was constructed so that approximately 80% of the time the indicator would give a reading between the values of -100 and +100. Both oversold and overbought areas as well as buy and sell signals are based on these two extreme numbers.

For example, when CCI is below -100 or above +100, it indicates oversold and overbought levels, respectively. And, some analysts believe a buy signal occurs when CCI moves above -100 and a sell signal occurs when CCI moves below +100.

Divergences can also be used to help illustrate the strength of buy and sell signals. For instance, both positive divergences (when the indicator increases while the security's price decreases) below -100 and negative divergences (when the indicator decreases while the security's price increases) above +100 strengthen the buy or sell signal.

CCI establishes a relationship between an asset's typical price, an average of the high, low and close for the previous time period, the Simple Moving Average of the typical price over the same time period, and the mean deviation, which is the average distance the prices are from the average.

Some analysts recommend using one-third of a security's complete cycle to calculate CCI. For example, if there's a period of 90 days between successive lows for one security, then the time period used to calculate CCI in this instance would be 30 days.

Free-Range Indicator

Though the CCI is a banded oscillator, which means it fluctuates between a range of low and high levels, its range is not bound within the numbers 0 to 100, like other banded oscillators such as the Stochastic Oscillator and the Relative Strength Index.

Calculations

  • Typical Price is the (High + Low + Close) / 3
  • SMATP is the Simple Moving Average of Typical Price (taken for 15 bars unless the user changes)
  • Mean Deviation is the summation of Absolute Value of (SMATP minus Typical Price), taken for the same 15-bar cycle

Sample Chart

Typically oscillating between +100 and -100, a CCI reading above +100 implies an overbought condition (and a pending price correction) while readings below -100 imply an oversold condition (and a pending rally). Keep in mind that the CCI can provide important information to a trader even when it is not giving entry signals. If a market stays inside the +/-100 range most of the time, it's demonstrating the absence of a trend, so it might be best to avoid that market or use a countertrend trading strategy.

Despite its name, the CCI can be used effectively on any type of security, not just commodities.

The strategies described in this article are for information purposes only, and their use does not guarantee a profit. None of the information provided should be considered a recommendation or solicitation to invest in, or liquidate, a particular security or type of security. Investors should fully research any security before making an investment decision. Securities are subject to market fluctuation and may lose value.