Commodity Channel Index
The commodity channel index or CCI, was originally developed to assist in trading the commodity markets by Donald Lambert. The CCI is a momentum indicator. Momentum indicators Many commodities trade in a cyclical fashion, moving up or down based certain seasons or economic activity. The CCI was developed to identify changes in those cycles.
The CCI is used to spot overbought and oversold conditions in a market. Overbought simply means the market has moved to high in price and profit taking is likely to occur. If a market is oversold, a market has moved to low in price and some buying should occur.
Originally, with the CCI, a security is considered oversold when the CCI moves below –100 and is considered overbought when the CCI moves above +100. A signal occurs when the CCI moves back through the –100 or +100 line.
There are many ways to utilize the movement in price reflected in the CCI. Traders look for divergence, trendline breaks and patterns in the CCI just as they would in price itself. As with any indicator, the CCI should be used in combination with other forms of technical study, not solely on its own.
The following chart of IBM shows with the CCI.
