CCI (Commodity Channel Index)
Momentum oscillator that measures price deviation from statistical average, essential for identifying cyclical patterns and overbought/oversold conditions
Technical Overview
Commodity Channel Index (CCI) is a momentum oscillator developed by Donald Lambert that measures how far a security’s price deviates from its statistical mean. Originally designed for commodities, CCI works equally well on stocks, forex, and other markets to identify cyclical turning points.
Key Insight: CCI oscillates around zero with no upper or lower bounds, making it unique among oscillators. Values above +100 indicate overbought conditions, while values below -100 suggest oversold conditions. The further from zero, the stronger the momentum.
How CCI Works
What CCI Actually Measures
Think of CCI as a “momentum deviation meter” that answers: “How far is price from its normal cyclical pattern?”
Step 1: Calculate Typical Price
Averages High, Low, and Close for complete price picture
Step 2: Find Mean Deviation
Measures how much typical price varies from its average
Step 3: Generate CCI Score
Normalizes deviation to create oscillator around zero
Understanding CCI Levels
Major reversal potential
Potential buying opportunity
Balanced market conditions
Potential selling opportunity
Major reversal potential
Key CCI Components
Typical Price
Average of High, Low, and Close prices that provides a more complete picture of price action than using just closing prices
Moving Average
20-period SMA of typical price that establishes the baseline for measuring price deviation and cyclical patterns
Mean Deviation
Statistical measure of how much typical price varies from its average, used to normalize the CCI oscillator values
Lambert Constant (0.015)
Statistical factor that ensures approximately 70-80% of CCI readings fall within the normal range of -100 to +100
Strategy Integration
5-Day Predictions
How CCI Powers Short-Term Momentum Analysis:
- Reversal Signals: CCI extremes (±100) provide high-probability reversal entry points for 5-day trades
- Momentum Confirmation: CCI direction validates price momentum and trend continuation signals
- Overbought/Oversold Filtering: Extreme CCI readings (±200) trigger position size reductions
- Zero-Line Dynamics: CCI crossing zero confirms trend changes and entry timing
- Divergence Detection: CCI divergences with price signal potential trend exhaustion
Real Impact: CCI provides timing precision for mean reversion and momentum trades
1-Year Predictions
How CCI Enhances Long-Term Cyclical Analysis:
- Cyclical Pattern Recognition: Monthly CCI helps identify major market cycles and turning points
- Regime Shift Detection: Persistent CCI extremes signal major market regime changes
- Strategic Entry Zones: Extreme CCI readings provide strategic accumulation/distribution zones
- Market Sentiment Gauge: CCI patterns reflect underlying market psychology and cycles
- Portfolio Timing: CCI extremes guide major portfolio allocation and rebalancing decisions
Real Impact: CCI helps time major strategic market positions and cycle-based allocations
CCI Trading Applications
Why Use CCI in Trading?
- Unbounded oscillator that captures extreme momentum moves
- Excellent for identifying cyclical patterns and market cycles
- Provides clear overbought/oversold signals with statistical backing
- Effective for both mean reversion and momentum trading strategies
- Works well across different asset classes and timeframes
- Useful for divergence analysis and trend strength assessment
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