Technical Analysis Workshop Series

Session Eight
Commodity Channel Index
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 Agenda
• Introduction To commodity channel
index
• Applications
• Q&A

INTRODUCTION Commodity Applications Q&A

Channel Index
 Introduction to Commodity channel
index

Commodity PIVOT
INTRODUCTION Applications Q&A
Channel Index POINTS
S
 Introduction

Originally created to identify cycles in Commodities

Creator Donald Lambert

Can also be used for stocks and the forex market

INTRODUCTION Commodity Applications Q&A

Channel Index
 Reason behind the creation

• Lambert believed that every commodity or stock moves in

cycles
• High and low points are established within a fixed period
• One cycle ( Time from high to low)

INTRODUCTION Commodity Applications Q&A

Channel Index
 Definition
• An oscillator used in technical analysis to help determine when an
investment vehicle has been overbought and oversold. The Commodity
Channel Index, first developed by Donald Lambert, quantifies the
relationship between the asset's price, a moving average (MA) of the
asset's price, and normal deviations (D) from that average.

INTRODUCTION Commodity Applications Q&A

Channel Index
 Calculation
• CCI = (Typical Price - 20-period SMA of TP) /
(.015 x Mean Deviation)
• Typical Price (TP) = (High + Low + Close)/3
• Constant = .015

INTRODUCTION Commodity Applications Q&A

Channel Index
 Calculation
• 0.15?
• Scaling constant, to ensure approx 70%-80%
of CCI values fall between 100 and -100
• % also depends on periods
• Longer period more stable (More values falling
within the band of 100 and -100)
• Shorter periods more volatile
• Averaging/smoothing
INTRODUCTION Commodity Applications Q&A
Channel Index
 Calculation

• Mean Deviation
• Ssubtract the most recent 20-period average
of the typical price from each period's typical
price.
• Take the absolute values of these numbers.
• Sum the absolute values.
• Divide by the total number of periods (20).

INTRODUCTION Commodity Applications Q&A

Channel Index
 Excel

INTRODUCTION Commodity Applications Q&A

Channel Index
 Timing trades

Commodity
INTRODUCTION Channel Index Applications Q&A
 Determining time interval
• Time interval plays crucial role in enhancing
accuracy of the CCI
• Prediction of cycle through moving
averages
• Thus, more attuned MA amount is to cycle,
the more accurate the average
• Default timing 20
• More accurate interval will reduce
occurrence of false signals

Commodity
INTRODUCTION Channel Index Applications Q&A
 Determining time interval
• Steps:
• Open up the stock's yearly chart.
• Locate two highs or two lows on the chart.
• Take note of the time interval between
these two highs or lows (cycle length).
• Divide that time interval by three to get the
optimal time interval to use in the
calculation (1/3 of the cycle).Read more:

Commodity
INTRODUCTION Channel Index Applications Q&A
• Oct 6- Aug 9, approx 225 days, 1/3= 75
 Application

• Lambert recommends 1/3 cycle time

• 30 day cycle, use 10 day for the CCI
calculation

Commodity
INTRODUCTION Channel Index Applications Q&A
• CCI measures the difference between a
security's price change and its average
price change.
• High positive readings indicate that
prices are well above their average,
which is a show of strength.
• Low negative readings indicate that
prices are well below their average,
which is a show of weakness.
Commodity
INTRODUCTION Channel Index Applications Q&A
 • The Commodity Channel Index (CCI) can
be used as either a coincident or leading
indicator.
• As a coincident indicator, surges above
+100 reflect strong price action that can
signal the start of an uptrend.
• Plunges below -100 reflect weak price
action that can signal the start of a
downtrend.
Commodity
INTRODUCTION Channel Index Applications Q&A
 • As a leading indicator, chartists can look
for overbought or oversold conditions
that may foreshadow a mean reversion.
Similarly, bullish and bearish divergences
can be use to detect early momentum
shifts and anticipate trend reversals.

Commodity
INTRODUCTION Channel Index Applications Q&A
 Leading indicator
• Leading indicators are designed to lead
price movements. Most represent a form
of price momentum over a fixed look-
back period, which is the number of
periods used to calculate the indicato

Commodity
INTRODUCTION Channel Index Applications Q&A
 Leading indicator
• Many leading indicators come in the form of
momentum oscillators. Generally speaking,
momentum measures the rate-of-change of a
security's price. As the price of a security rises, price
momentum increases. The faster the security rises
(the greater the period-over-period price change), the
larger the increase in momentum. Once this rise
begins to slow, momentum will also slow. As a
security begins to trade flat, momentum starts to
actually decline from previous high levels

Commodity
INTRODUCTION Channel Index Applications Q&A
 Application
• Movement across +100 & -100
• Out of Normal price action
• Over+ 100, signal strong uptrend
• Below-100, Signal strong downtrend
• Bearish/Bullish Filters
• CCI favours Bulls when postive and Bears when
negative
• Risky to use simple line cross over: whipsaws
• Wait for more obvious signals, above +100
• Lagged entry, reduced whipsaws

Commodity
INTRODUCTION Channel Index Applications Q&A
 Whipsaw
• A condition where a security's price heads in one
direction, but then is followed quickly by a
movement in the opposite

Commodity
INTRODUCTION Channel Index Applications Q&A
 Overbought/oversold

Commodity
INTRODUCTION Channel Index Applications Q&A
 Overbought/oversold

• +100 overbought, -100 oversold

• Identify sideways market- Look at MA,
relatively flat, price oscillating around MA
• Identify Overbought CCI with divergence
• Look for cross down through + 100, moving
towards typical price

Commodity
INTRODUCTION Channel Index Applications Q&A
 Overbought/oversold

• Identifying overbought and oversold levels can be

tricky with the Commodity Channel Index (CCI).
• Theoretically, there are no upside or downside
limits. This makes an overbought or oversold
assessment subjective
• securities can continue moving higher after an
indicator becomes overbought.
• Likewise, securities can continue moving lower
after an indicator becomes oversold
• .

Commodity
INTRODUCTION Channel Index Applications Q&A
 Overbought/oversold

• The definition of overbought or oversold varies for

the Commodity Channel Index (CCI). ±100 may
work in a trading range, but more extreme levels
are needed for other situations. ±200 is a much
harder level to reach and more representative of a
true extreme.
• Selection of overbought/oversold levels also
depends on the volatility of the underlying security.
The CCI range for an index ETF, such as SPY, will be
usually be smaller than for a most stocks, such as
Google.

Commodity
INTRODUCTION Channel Index Applications Q&A
 Bullish/bearish divergences

Commodity
INTRODUCTION Channel Index Applications Q&A
 Bullish/bearish divergences

• Divergences signal a potential reversal point

because directional momentum does not
confirm price.
• A bullish divergence occurs when the
underlying security makes a lower low and CCI
forms a higher low, which shows less
downside momentum
• A bearish divergence forms when the security
records a higher high and CCI forms a lower
high, which shows less upside momentum
Commodity
INTRODUCTION Channel Index Applications Q&A
 Bullish/bearish divergences

• Be careful of strong trends

• Divergence can be misleading
• A strong uptrend can show numerous
bearish divergences before a top actually
materializes.
• Conversely, bullish divergences often after
appear in extended downtrends.

Commodity
INTRODUCTION Channel Index Applications Q&A
 DMI

• Directional movement can be used on its own or as a

filter

• 2 lines are generated for DMI study

• +DI
• Measures positive (upward) movement

• -DI
• Measures negative (downward) movement

Commodity
INTRODUCTION Channel Index Applications Q&A
 Trendline break

Commodity
INTRODUCTION Channel Index Applications Q&A
 Trendline break

• Identify trend- MA, e.g ma slope down, only

take trendline breaks on the downside
• Draw trendline on CCI, connects lows on CCI
• Enter at break of CCI trendline
• CCI Trendline break earlier allows earlier entry
than break on price, with confirmation
• Lead to higher profits

Commodity
INTRODUCTION Channel Index Applications Q&A
 Additional

• Add in filters like a MA line to figure out

the general direction of the trend, helping
you choose between long and short plays

Commodity
INTRODUCTION Channel Index Applications Q&A
 Conclusion

• CCI is a versatile momentum oscillator that

can be used to identify overbought/oversold
levels or trend reversals.
• The indicator becomes overbought or
oversold when it reaches a relative extreme.
• That extreme depends on the characteristics
of the underlying security and the historical
range for CCI.

Commodity
INTRODUCTION Channel Index Applications Q&A
 Conclusion

• Volatile securities are likely to require greater

extremes than docile securities.
• Trend changes can be identified when CCI
crosses a specific threshold between zero and
100.
• use CCI in conjunction with other indicators or
price analysis. Another momentum oscillator
would be redundant, but On Balance Volume
(OBV) or the Accumulation Distribution Line
can add value to CCI signals.

Commodity
INTRODUCTION Channel Index Applications Q&A
 Q&A

INTRODUCTION
INTRODUCTION Commodity Applications Q&A
Channel Index
 THANK YOU!

INTRODUCTION Commodity TECHNICAL

INTRODUCTION FM & BC MODEL Applications
DOW THEORY Q&Q
A&A
ANALYSIS
Channel Index