The Commodity Channel Index (CCI) is a technical analysis indicator developed by Donald Lambert in the 1980s. The indicator can help you identify price trends, reversals, as well as trend strength. The main use of the CCI is as a standalone momentum indicator that can help you predict the change in price direction.
How to read the Commodity Channel Index (CCI)
In addition to being used as a standalone momentum indicator, the Commodity Channel Index can also help you spot potential overbought and oversold areas as it oscillates between +200 and -200. A typical interpretation of the CCI is that readings above +100 indicate an overbought condition, while readings below -100 an oversold condition.
In the case of oversold and overbought conditions, Lambert theorized that the market would naturally adjust itself and revert back to its mean prices. The reversion to the mean is a common idea found in technical analysis that can be expanded upon by using linear regression techniques.
Signals generated by the Commodity Channel Index (CCI)
There a number of signals generated by the CCI. The first is buy and sell signals generated by oversold and overbought conditions. A buy signal can be given when price moves above -100, while a sell signal can be given when price moves below +100.
Like most technical indicators, it’s a best practice to combine the CCI with other technical tools such as trendline breaks and divergences as they add weight to the price movements. For example, a divergence below -100 would give credence to a move back above -100, while the reverse would also apply to price movements above +100.
Another strong signal combination is to use the CCI in conjunction with trendline breaks. A move above -100 with a trendline break could be considered a bullish move. While for overbought conditions, a drop below +100 with a supporting trendline break would be considered bearish.