What Is the CCI Indicator?

10/01/2014 6:00 am EST

Focus: COMMODITIES

Bernard Stegmueller of Fusion Trading Zone breaks down when and how to use the Commodity Channel Index (CCI), how it can be interpreted in several different ways, and how it is not just limited to commodities.

Commodity Channel Index (CCI)

Definition: The value of the Commodity Channel Index (CCI) is not limited to commodities and was developed by Donald Lambert as a market timing tool, designed to keep trades neutral in a sideways moving market and identify entry points when a breakout occurs. Specifically, this oscillator measures how high or low prices are relative to their statistical mean. A high value means prices are relatively high while a low value means the opposite. An oscillator refers to a momentum or rate-of-change indicator that is usually valued from -1 to +1 or 0% to %100.

The CCI is often best-suited for securities with cyclical patterns, with an optimal period being at least less than 1/3 the number of periods of the cycle.

Interpretation: The Commodity Channel Index can be interpreted in several different ways and can be incorporated into many different types of trading schemes or philosophies depending on the type of security and the periods being analyzed.

One interpretation is to use CCI as an overbought/oversold oscillator, meaning that when CCI is in its upper ranges, extending beyond +100, CCI is overbought and a price correction is forthcoming. When CCI is well into its lower ranges, extending below -100, a price rally is approaching.

A second interpretation is that when the CCI breaks into triple digits it will continue a trend.

  • When the CCI rises above +100, it is a bullish signal.
  • When the CCI dips below -100, it is a bearish signal.

Critics of the indicator say that CCI often misses the early part of the price movement. To overcome this, some traders use signals when the CCI crosses the zero.

  • When CCI crosses zero from negative to positive, it is potentially a bullish signal.
  • When CCI crosses zero from positive to negative, it is potentially a bearish signal.

A third interpretation is to integrate the two views, and look for divergences as the distinguishing factor. For instance, if the price is breaking new highs, as the CCI is not, the security is potentially oversold, whereas if both are reaching new highs, then an uptrend will possibly ensure. The reverse conditions can hold true when the price reaches new lows over a given period.

By Bernard Stegmueller of Fusion Trading Zone

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