CCI (The Commodity Channel Index)
What It Is: The CCI, or Commodity Channel Index, was created by Donald Lambert. The single-line momentum indicator measures the variation of a stock or index’s price from its statistical mean.
Although developed to analyze cyclical commodities, it offers effective signals on other securities, such as equities and exchange traded funds (ETFs).
Range: Generally +200 to -200. Zero is the mid-point.
Default or look-back period: Since the CCI works best by indentifying peaks and troughs contained in cyclical price patterns, the indicator works best when you can identify a trading vehicle that moves in reasonably well-defined cycles.
Many traders use a 14-day or 20-day CCI on a daily chart; however, you can easily get “whipsawed” with this setting, especially when the CCI goes into “hip-hop” mode. I prefer to use the CCI on a longer time frame, such as the 20-week CCI on a weekly chart. Using that technique, I find the CCI issues more profitable signals, with less whipsawing and hip- hop action.
What the CCI Tells You: Like the RSI, the CCI is an oversold/overbought oscillator that also displays divergences. When the CCI penetrates +100 on its upper range, it signals the security is trading at a high premium to its average mean, and so is considered to be overbought. When the CCI dips below -100 on the lower range, the stock is trading at a discount to its mean, and is oversold.
Figure 2 displays a weekly chart of the iShares Biotech ETF (IBB). I’ve plotted the 39-week moving average (close to the 200-day moving average on a daily chart), and the 20-week CCI (middle scale). I’ve also plotted the =100 and -100 ranges on the CCI scale, so you can see overbought and oversold zones more easily.
FIGURE 2. RealTick® graphics used with permission of Townsend Analytics, Ltd. ® 1986 – 2008.
Notice that the IBB tends to move in price cycles, bottoming in March and July/August. Another clue that it moves in cycles: the 39-week MA trundles along at a shallow, barely rising, angle. IBB’s price rolls above and below the MA like a roller coaster.
In the summer months of 2006, the IBB fell, yet the CCI moved higher in a bullish divergence. By mid-July, the IBB reversed and headed much higher into the end of the year.
A similar signal appeared in March of 2007; the IBB writhed to its lows in a selling climax, while the CCI signaled bluer skies were ahead. Summer of that year produced a nice rally into October.
Then, abruptly, the CCI signaled a bearish warning, and the IBB sold off quickly, along with the rest of the stock market.
Note the CCI’s bullish divergence in early 2008, while the IBB melted to relative new lows. The CCI soon shot up to penetrate its -100 mark, signaling a “buy.”
On the hard right edge of the chart, you’ll note that the CCI has shot above its +100 mark, and the IBB looks positive. As long as the CCI moves higher, traders and investors can manage their positions with trailing stops. If the indicator hooks down in a bearish signal, though, traders will want to take partial or all profits.
HOT TIP: Again, please don’t buy an oversold stock just because an oscillator bounces and signals a “buy.” Other criteria such as candlesticks, volume and moving averages should be taken into consideration.
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