The commodity channel index (CCI) is a technical tool. It is an indicator of the price oscillator group. Donald Lambert developed the commodity channel index, which was featured in Commodities magazine, now Futures magazine, in 1980. The original intent of the indicator was to identify turning points in commodities markets. It works equally well in stocks and other markets.
One interpretation of the oscillator is that a market is over-bought, thus subject to going down when the index rises to above 100. In this scheme, dropping to under -100 indicates the market is ready to rise. Another view is that markets need to move the index to over 200 or under -200 to have gone sufficiently far that they should be ready to turn. Those who subscribe to this view tend to consider a bullish trend has begun when the commodity channel index first goes above 100, while thinking the first move below -100 denotes the beginning of a bear trend. Yet another school of thought is to buy when the CCI crosses above zero and prices are above a medium length moving average, and going short when the CCI crosses below zero with prices below the moving average.
The commodity channel index is determined by subtracting the average price from the typical price, and dividing by the average deviation of price from the average price, multiplied by 0.015. Typical price is defined as the average of the sum of the high, low, and close price of a commodity on a single trading day. The average of the typical price is the sum a number of units of the commodities' price, divided by that same number of units. The deviation of price equals the sum of the difference between the typical price and the average price across a number of periods, and then divided by that same number of periods. Finally, 0.015 is an arbitrary factor the creator used in an effort to have about 80% of the values of CCI to lie between -100 and 100.
Bollinger Bands are, in some respects, quite similar to the commodity channel index. This analysis tool uses standard deviation from the moving average rather than the mean deviation used by the CCI. When plotted on price charts, the difference is small. The CCI will cross above 100 nearly simultaneously with prices crossing above the upper Bollinger Band. Similarly, prices cross below the lower Bollinger band when the CCI crosses below -100.
