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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:
- 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.
- As an overbought/oversold indicator
The CCI usually oscillates between +/-100. Readings
outside these ranges imply an overbought/oversold condition.
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