CCI

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The Commodity Chanel Index (CCI) was developed by Donald Lambert. The assumption behind the indicator is that the prices of commodities (or stocks or bonds) move in cycles of highs and lows at periodic intervals. As a result of his work with daily charts (1 bar = 1 day) in an effort to predict cyclical turns, Lambert has recommended using a 20-day CCI.

The CCI calculation can be performed in four steps:

1. Calculate the last period's Typical Price
   
   TP = (H+L+C)/3
   where H = high, L = low, and C = close.
2. Calculate the SMATP - Simple Moving Average of the Typical Price (SMATP). accepting Lambert's recommendation to use a 20-day bar period:
   
   SMAT = Simple MA(20) applied to the TP calculated in step #1
3. Calculate the Mean Deviation.
   1. First, calculate the absolute value of the difference between the last period's SMATP and the typical price for each of the past 20 periods.
   2. Add these absolute values together and divide by 20 to calculate the Mean Deviation.
      
4. The last step is to calculate the CCI by the following formula:
   
   CCI = ( Typical Price - SMATP ) / ( .015 X Mean Deviation )

Chart 1: S&P 500 index - Commodity Chanel Index (CCI).

The Commodity Channel Index oscillates around the zero line. According to Lambert's technical analysis theory, CCI values below -100 indicate an oversold security/index and can be used as a "Buy" signal. Conversely, CCI values above +100 indicate an overbought security/index and can be used as a "Sell" signal. Furthermore, these overbought oversold indicators can be used as trading signals to buy and to sell.

Depending on the CCI period selected, you have a more or less volatile CCI. A shorter CCI (CCI with a shorter bar period setting) will be more volatile and will generate more trading signals. Conversely, the more periods that are used to calculate the CCI - the fewer signals will be generated.

The Commodity Channel Index is a versatile indicator that can produce a wide array of buy and sell signals. As with most technical indicators, a trading system should use the CCI in conjunction with other aspects of technical analysis. CCI fits into the momentum category of oscillators. In addition to momentum, volume indicators and the price chart may also influence a technical assessment.

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