Developed by Donald Lambert and featured in "Commodities" magazine in 1980, the Commodity Channel Index (CCI) is a versatile indicator that can be used to identify a new trend or warn of extreme conditions. Lambert originally developed CCI to identify cyclical turns in commodities, but the indicator can be successfully applied to indices, ETFs, stocks, and other securities.
In general, CCI measures the current price level relative to an average price level over a given period of time:
- CCI is relatively high when prices are far above their average.
- CCI is relatively low when prices are far below their average.
In this manner, CCI can be used to identify overbought and oversold levels.
Usually CCI uses typical price, but this version uses an interesting variation of a typical price : instead of using (high+low+close)/3 it uses (highest high + lowest low + close)/3. That might seem as a small change, but it enhances the extremes and make the CCI values more responsive to sudden price changes
