Commodity Channel Index (CCI)

The Commodity Channel Index measures the position of price in relation to its moving average. This can be used to highlight when the market is overbought/oversold or signal when a trend is weakening. The indicator is similar in concept to Bollinger Bands but is presented as an indicator line rather than as overbought/oversold levels. The Commodity Channel Index was developed by Donald Lambert and is outlined in his book Commodities Channel Index: Tools for Trading Cyclic Trends.

High values show that prices are abnormally high compared to average prices whereas low values indicate that prices are abnormally low. Contrary to its name, the CCI can be used effectively on any type of security and is not just restricted to Commodities. It can be used for detecting divergences from the price trend and as an overbought/oversold indicator. It is noticed that when watching the CCI in relation to the current price, it is useful to watch for new highs and lows. If the price of the security is reaching new highs and the CCI is not reaching new highs, a price alteration may be forthcoming.

The CCI typically ranges in value from -100 to +100. Values above this range indicate that the security may be becoming overbought whilst values below this range indicate it may be becoming oversold. As with other overbought/oversold indicators, this can often mean that the price will correct to more typical levels.

Most commonly, it is read by looking for divergences similar to that of the RSI Indicator and others. Basically, it is being monitored for:

• A divergence to occur whereby the security’s prices make new highs while the CCI is failing to exceed its previous highs. This characteristic divergence is typically followed by a price correction.
• The CCI typically oscillates between ±100. To use the CCI as an overbought/oversold indicator, readings above +100 imply an overbought condition and warn of an upcoming price correction, while readings below -100 imply that oversold condition has occurred and an upcoming rally is most likely.

Normal Formula:

1. Calculate the Typical Price
2. Calculate an n-period simple moving average of the Typical Prices.
3. For each of the prior n-periods, subtract today’s Step 2 value from Step 1′s value n days ago. For example, if you were calculating a 5-day CCI, you would perform five subtractions using today’s Step 2 value.
4. Calculate an n-period simple moving average of the absolute values of each of the results in Step 3.
5. Multiply the value in Step 4 by 0.015.
6. Subtract the value from Step 2 from the value in Step 1.
7. Divide the value in Step 6 by the value in Step 5.

Typical Charting Program Formula:

TYP := (HIGH + LOW + CLOSE)/3;
(TYP-MA(TYP,N))/(0.015*AVEDEV(TYP,N))

Formula Parameters:

Commodity Channel Indicator Chart: