Commodity Channel Index

Overview

 

The Commodity Channel Index (CCI) measures the variation of a security's price from its statistical mean. High values show that prices are unusually high compared to average prices whereas low values indicate that prices are unusually low. Contrary to its name, the CCI can be used effectively on any type of security, not just commodities. The CCI was developed by Donald Lambert.

Interpretation

 

There are two basic methods of interpreting the CCI: looking for divergences and as an overbought/oversold indicator.

 

A divergence occurs when the security's prices are 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.

The CCI typically oscillates between ±100. To use the CCI as an overbought/oversold indicator, readings above +100 imply an overbought condition (and a pending price correction) while readings below -100 imply an oversold condition (and a pending rally).