An oscillator that measures the market’s momentum through the price’s variance from the statistical mean.
Overview
Commodity Channel Index (CCI) was developed by Donald Lambert to measure the variation of a security’s price from its statistical mean. The name does not imply that Lambert’s formula is only applied to commodities as the CCI is a technical indicator for all markets.
The CCI on the CAD/JPY daily chart 4/10/2011
Source: VT Trader
Interpretation
The CCI is an oscillator and therefore can be used to interpret the momentum. There are three basic methods of interpreting the CCI similar to any other oscillator:
Overbought/Oversold Conditions: Typcially the CCI oscillators between -100 and +100. Readings above +100 imply overbought condition warning of a bearish reversal, while readings below -100 imply oversold condition warning of a bullish reversal. However strong pushes through these levels can also be interpreted as momentum breakouts and suggest possibility of follow through after resolving the overbought/oversold conditions.
Divergence: A bullish divergence occurs when price action is making new lows while the CCI fails to do the same, warning of a correction to the decline. The bearish divergence occurs when the price action is making new highs while the CCI fails to do the same, warning of a correction to the rally.
Trendlines can be drawn to connect peaks and troughs. A break above trendlines can be interpreted as a bullish signal and vice versa. From oversold levels, an advance above -100 and trend line breakout could be considered bullish. From overbought levels, a decline below +100 and a trend line break could be considered bearish.
