The Commodity Channel Index (CCI) is a technical indicator widely used in financial markets to identify overbought or oversold conditions in an asset. It measures the current price level relative to its historical average, indicating the momentum and potential future direction of the asset's price.
The CCI is calculated as follows:
CCI = (Typical Price - Simple Moving Average of Typical Price) / (0.015 * Mean Deviation)
The "Typical Price" is the average of the high, low, and closing prices of an asset. The "Simple Moving Average of Typical Price" is the average of the typical prices over a specified period, often 20 or 14 days. The "Mean Deviation" measures the average deviation of the typical prices from the moving average.
The resulting CCI value oscillates around a zero line. Readings above +100 suggest that the asset is overbought and may be due for a price correction or reversal. Conversely, readings below -100 indicate oversold conditions and imply a potential price rebound. Traders might look to buy when the CCI crosses above -100 and sell when it crosses above +100, while also considering other technical indicators and market conditions.