What is the Commodity Channel Index?
The CCI, or Commodity Chanel Index, was first designed for commodities markets. Developed in the 1980s by an American, Donald Lambert, ITC has seen its popularity increase over the years and is now used in all markets.
The CCI is quite dynamic, which makes it attractive to traders. Like the RSI, overbought and oversold situations can be highlighted with the CCI but as this indicator is not bounded, the curve can rise or fall well above the + 100 and – 100 levels.
Generally, we are only interested in the values between the +100 and -100 terminals because between these two terminals, the prices are considered as being in range.
Above the 100 mark, there is a tendency where prices are overbought and below -100 where prices are oversold. Some trading strategies, therefore, consist in selling the stock when the CCI crosses the + 100 downward or buying when the CCI crosses the – 100 upward.
The ICC is very useful, especially for reading some divergences. It gives fairly reactive signals, so we can consider that it is quite close to the RSI. However, for the use of divergences, I recommend the RSI that I find more relevant.
Standard bearish divergence: prices are a new high while the CCI is a new low.
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