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Commodity
Channel Index
Description
The
Commodity Channel Index (CCI) is calculated by
first determining the difference between the mean
price of a commodity and the average of the means
over the time period chosen.
This difference is then compared to the
average difference over the time period (this
factors in the commodity's own inherent
volatility). The
result is then multiplied by a constant that is
designed to adjust the CCI so that it fits into a
"normal" trading range of +/-100.
A
complete explanation of the CCI is beyond the
scope of the manual.
Further details on the contents and
interpretation of the CCI can be found in the
October 1980 issue of Commodities magazine
(now known as Futures).
The article was written by Donald Lambert.
Interpretation
While
the CCI was originally designed for commodities,
the indicator also works very well with stocks and
mutual funds.
There
are two methods of interpreting the CCI:
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Looking
for divergences
A popular method of analyzing the CCI is
to look for divergences in which the
underlying security is making new highs while
the CCI is failing to surpass its previous
highs. This
classic divergence is usually followed by a
correction in the security's price.
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As
an overbought/oversold indicator
The CCI usually oscillates between +/-100.
Readings outside these ranges imply an
overbought/oversold condition.
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