COMMODITY CHANNEL INDEX (CCI)

  
Commodity Channel Index (CCI) developed by Donald Lambert to identify cyclical behavior of commodity. It’s also useful for Stocks.  It’s derives by using statistical mean.

Description :

The Commodity Channel Index Commodity Channel Index (CCI) useful to identify price reversals and it’s also generates buy | sell signals.

When Commodity Channel Index (CCI) goes above +100 it’s indicates overbought & when Commodity Channel Index (CCI) comes below +100 it’s indicates stocks are ready to fall and CCI goes below -100 it’s indicates stocks are oversold & when its cross above -100 it’s indicates stocks are ready to move up.

When Commodity Channel Index (CCI) gives positive divergence that’s a good buy signal & when Commodity Channel Index (CCI) gives negative divergence it’s a sell signal. You can try different Commodity Channel Index (CCI) period & find out which period works better for you.

More details you can found in Oct-1980 issue of Commodities Magazine article written by Donald Lambert

How to Calculate?

1) Decide the time period say 20 days
2)  Calculate Typical Price

                                          TP = (H+L+C) / 3

      Where H= High, L = Low, C = Close

3) Calculate TP for defined time period, here its 20 days
4) Calculate Avg  of TP for defined time period
5) Calculate Mean Deviation for Defined period 
6)  Calculate the absolute values of difference between last period simple moving average and TP for each of the +past defined period here 20 days.
7)  Calculate mean deviation
Add all absolute values calculated above in stapes (6) and divide by defined period.

                                 CCI = [ (TP - SMAOFTP) / (0.015)*(Mean Deviation)



Divergence in the Commodity Channel Index (CCI):

A lower peak in the Commodity Channel Index (CCI) against highr highs in the stock market called negative divergence and typically it's a Sell signal.
A higher peak in the Commodity Channel Index (CCI) against lower lows in the stock market called positive divergence and typically it's a Buy signal.

To get good result with Commodity Channel Index (CCI) we need to use it with other technical indicatores like Moving Average (MA) | On Balance Volume (OBV) | Percentage Price Oscillators (PPO) | Price Rate Of Change (ROC) | Relative Strength Index (RSI) | Stochastic Oscillator (STO) | Chaikin Money Flow oscillator (CMF). When we use two or three technical indicators and in case of positive divergence and negative divergence it giving real good result, only you need to change time span and find out which is a better pair for you.