# What is Commodity Channel Index (CCI) in Technical Analysis?

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Description: The Commodity Channel Index or CCI is a momentum oscillator that was developed by Donald Lambert during the 1980s. The indicator helps us to gauge the current price of an asset with respect to its average price over a certain period of time. CCI tends to remain low when prices are trading way below their average level. Similarly, CCI tends to remain high when prices are trading way above their average level. Hence, it is a very useful technical analysis tool to identify overbought or oversold levels.

CCI Calculation

Commodity Channel Index (CCI) calculation involves taking the difference between the mean price

of a financial instrument and the average of those means over a certain period of time (default setting is 20 periods). next step involves comparing this difference with the average difference in prices over the same period of time. This gives us an idea of how volatile the instrument is. The last step involves multiplying the resulting figure with a constant so as to plot the oscillator on a scale of +100 to -100.

In a nutshell,

CCI = (Avg Price – 20 SMA of Avg Price)/ (0.015 * Mean Deviation)

where, Avg Price = Typical Price = (High + Low + Close)/3

The constant 0.015 is used so as to make sure that 70% to 80% of the indicator readings remain within a range of +100 to -100.

CCI Interpretations

Overbought and Oversold: The default overbought and oversold levels on the CCI are +100 and -100 respectively. However, one can adjust the bands to +200 and -200 for volatile counters and filtering trading signals further. However, one should note that a security can remain overbought for elongated periods after CCI crosses over +100. Similarly, a security can remain oversold for long periods when the oscillator dips below -100. Hence, a reading above +100 or -100 doesn’t necessarily mean a change in trend is imminent. Strong Trends: A reading above +100 on the CCI indicates that a strong uptrend is starting. Similarly, a reading below -100 indicates that the downtrend is gathering momentum. However, one should wait for a favorable entry such as a pullback to time their trades better. CCI Divergences: When prices make a higher high but CCI makes a lower high, we get a Bearish Divergence. Similarly, when prices make a lower low and the CCI makes a higher low, we get a Bullish Divergence which often alerts us forehand of a trend reversal.   