Commodity Channel Index
The Commodity Channel Index (CCI) is a momentum based technical indicator first time introduced by Donald Lambert in 1980, the most often user case is an identifying market cycles, reaching a condition of being overbought or oversold. From technical perspective CCI measures the change in an instrument's price relative to a pre-defined moving average (MA) of the price divided by 1.5% of a normal deviation (D) from that average.
CCI = (Price - MA)/0.015*STD
Where: Price - current close price MA - selected N-period moving average STD - Standart deviation of price
- Indication of overbought/oversold levels - The most useful case of the commodity channel index is an identifying of price reversals, an instrument would be deemed oversold when the CCI dips below −100 and overbought when it exceeds +100. From oversold levels, a buy signal might be given when the CCI moves back above −100. From overbought levels, a sell signal might be given when the CCI moved back below +100.
- Divergence/Convergence - Divergence/Convergence pattern is a form of price action when new high(low) of the price not confirmed with a new high/low of CCI. Such price and indicator’s behavior can be interpreted as the weakness of current existing trend.