Commodity Channel Index
The Commodity Channel Index or CCI was developed by Donald Lambert in 1980 to allow chartists identify cyclical price intervals. CCI is one of the leading indicators which are designed to lead price movements or trends. Furthermore, it is a momentum oscillator and a banded oscillator which moves above and below two bands that signify overbought and oversold levels. Unlike the Relative Strength Index or the Stochastic Oscillator that ranges between 0 and 100, CCI is not range bound. Instead, CCI fluctuates from +100 on overbought levels to -100 on oversold levels.
Lambert recommended the 20-day period as the common default value, but the value may vary to suit individual preferences and choice of securities.
Soybeans – Electronic
The 20-day CCI for Soybeans Electronic provides a good example of an oversold signal in August 2007 after CCI fell below -100 (green circle). A rise from -100 depicted an upward trend. However, in May 2007, CCI moved above +100 for several times, but prices still remained bullish (reed circle). Thus, it is better if CCI is used in conjunction with other technical indicators so as to limit the number of whipsaws.