technical analysis workshop series session eight

Technical Analysis Workshop Series

Session Eight

Commodity Channel Index

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Agenda

• Introduction To commodity channel

index

• Applications

• Q&A

Q & AINTRODUCTION ApplicationsCommodity

Channel Index

Introduction to Commodity channel

index

PIVOT

POINTS

S

Q & AINTRODUCTION Commodity

Channel IndexApplications

Originally created to identify cycles in Commodities

Creator Donald Lambert

Can also be used for stocks and the forex market

Introduction



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)



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.



Calculation

• CCI = (Typical Price - 20-period SMA of TP) /

(.015 x Mean Deviation)

• Typical Price (TP) = (High + Low + Close)/3

• Constant = .015



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



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



Timing trades

INTRODUCTION Q & AINTRODUCTIONCommodity


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



• 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.



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



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



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



Overbought/oversold



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



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




• 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




• 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.



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 Q & AINTRODUCTION ApplicationsCommodity

Channel Index

Trendline break



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



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



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.



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.



Q & A

INTRODUCTIONINTRODUCTION Commodity

Channel IndexQ & AINTRODUCTION Applications

THANK YOU!

FM & BC MODELTECHNICAL

ANALYSISDOW THEORY Q & AINTRODUCTION Commodity

Channel IndexQ & AINTRODUCTION Applications

technical analysis workshop series session eight

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