The Commodity Channel Index is an oscillator introduced in 1980 in Commodities magazine, but it can be used for indexes, ETFs, stocks, and so on. It basically displays the relative daily difference above or below a simple moving average.

It can be used to identify overbought and oversold conditions and to confirm trends. The CCI averages out the prices of a commodity (or security) for a day, calling it the Typical Price, and compares it to the simple moving average for a time period (usually 20 days).

The mean deviation is factored in with a constant (usually 0.15) that keeps most of the results on the oscillator between -100 and 100. The 0 value on the oscillator represents the moving average line. If the oscillator goes over 100, it may indicate a strong trend, but it really tends to indicate overbought conditions and a pending reversal.

The chart can reveal bullish or bearish divergences between peaks and troughs as compared to the price chart of the commodity that may be a better indicator of momentum and pending reversals than the oscillator’s value on any one day.

Instead of using days as the period to calculate the typical price, other time frames which are smaller or larger can be used, and the other values of the oscillator can be tweaked for each analyst’s purposes.

Is There Any Merit to the Momentum Theories?
What is Index Investing?