Commodity Channel Index

Technical Analysis Workshop Series Session Eight Commodity Channel Index
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Agenda
Introduction To commodity channel index Applications Q&A
INTRODUCTION
Commodity Channel Index
Applications
Q&A
Introduction to Commodity channel index
INTRODUCTION
Applications
PIVOT Q&A POINTS S
Introduction
Originally created to identify cycles in Commodities Creator Donald Lambert Can also be used for stocks and the forex market
INTRODUCTION
Applications
Q&A
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
Applications
Q&A
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
Applications
Q&A
Calculation
CCI = (Typical Price - 20-period SMA of TP) / (.015 x Mean Deviation) Typical Price (TP) = (High + Low + Close)/3 Constant = .015
INTRODUCTION
Applications
Q&A
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 Channel Index Applications Q&A
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).
Excel
INTRODUCTION
Applications
Q&A
Timing trades
INTRODUCTION
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
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:
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
INTRODUCTION
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.
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.
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.
INTRODUCTION
Applications
Q&A
Leading indicator
Leading indicators are designed to lead price movements. Most represent a form of price momentum over a fixed lookback period, which is the number of periods used to calculate the indicato
INTRODUCTION
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
INTRODUCTION
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
Whipsaw
A condition where a security's price heads in one direction, but then is followed quickly by a movement in the opposite
INTRODUCTION
Applications
Q&A
Overbought/oversold
INTRODUCTION
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
INTRODUCTION
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 .
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.
Bullish/bearish divergences
INTRODUCTION
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
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.
INTRODUCTION
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
INTRODUCTION
Applications
Q&A
Trendline break
INTRODUCTION
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
INTRODUCTION
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
INTRODUCTION
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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.
INTRODUCTION
Applications
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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.
INTRODUCTION
Applications
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Q&A
INTRODUCTION INTRODUCTION
Applications
Q&A
THANK YOU!
TECHNICAL Commodity INTRODUCTION INTRODUCTION FM & BC MODEL ANALYSIS Channel Index
Applications DOW THEORY
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Technical Analysis Workshop Series Session Eight Commodity Channel Index

DISCLOSURES & DISCLAIMERS

DISCLOSURES & DISCLAIMERS