CCI measures a security’s variation from the statistical mean.
Like many other oscillators, there are two basic methods of interpreting the Commodity Channel Index: identifying overbought/oversold areas and price/oscillator divergent signals. The CCI typically oscillates between +/-100. To use the CCI as an overbought/oversold indicator, readings above +100 imply an overbought condition, while readings below -100 imply an oversold condition. Signals are given when the oscillator enters either the overbought or oversold area and turns in the opposite direction.
Price = (high + low + close)/3
CCI = (today's typical price-today's moving average)/(today's mean deviation * 0.015)
A divergence occurs when the price of a security makes new highs/lows while the CCI fails to surpass its previous highs/lows. This divergence suggests that the momentum is coming out of the trend, and a reversal is imminent.
The Commodity Channel Index can be interpreted in several different ways, and can be incorporated into many different types of trading schemes or philosophies depending on the type of security and the periods being analyzed.
One interpretation is to use CCI as an overbought/oversold oscillator, meaning that when CCI is in its upper ranges, extending beyond +100, CCI is overbought and a price correction is forthcoming. When CCI is well into its lower ranges, extending below -100, a price rally is approaching.
A second interpretation is that when the CCI breaks into triple digits it will continue a trend.
When the CCI rises above +100, it is a bullish signal.
When the CCI dips below -100, it is a bearish signal.
Critics of the indicator say that CCI often misses the early part of the price movement. To overcome this, some traders use signals when the CCI crosses the zero.
When CCI crosses zero from negative to positive, it is potentially a bullish signal.
When CCI crosses zero from positive to negative, it is potentially a bearish signal.
A third interpretation is to integrate the two views, and look for divergences as the distinguishing factor. For instance, if the price is breaking new highs, as the CCI is not, the security is potentially oversold, whereas is both are reaching new highs, then an uptrend will possibly ensure. The reverse conditions can hold true when the price reaches new lows over a given period.