Few persons know about CCI. CCI is short for Commodity Channel Index. This is an index developed by Donald Lambert in 1980 to function as a versatile indicator to indicate new trends and to inform about extreme conditions on the market. Originally CCI were used to find cyclical turns in commodities, but have been used to analyze everything from stocks to different indices. CCI are measuring the current price in comparison to an average price over a given time period. CCI is low when prices are below average, and high when above average. This indicates that something is too expensive or too cheap. Since CCI measures the difference changes between security price and average price we get a good indicator of strength (+ 100) and weakness (- 100) in prices. To make it short CCI is a good indicator where +100 indicate an uptrend and -100 a downtrend. It is possible to use CCI to foreshadow a mean reversion (!). Note that CCI favors bulls when positive and bears when negative.
For example in the beginning it might be difficult to identify overbought and oversold according to the CCI. First of all CCI is a subjective matter, because there is no upside or downside. It is possible to go lower than low and higher than high. Then if you think you have reached max it can continue to grow even higher and vice versa. Trends might be indicated trough this index, but it is not fool proof. We simply do not know the end of a trend, and of that reason we might be fooled to believe that this is the point of change.
Experts play around with different models and learn to understand the ups and downs in CCI. Perhaps we might say that CCI indicates bullish potential (when the underlying security is lower and the CCI have a higher low – less downside momentum) and bearish potential (when the underlying security is higher and the CCI have a lower high – less upside momentum). Remember that a bullish divergence might look like an extended downtrend.
Let us see CCI as a nice tool to give us indicators of momentum in the market or trends. Today we have an interesting situation in CCI. As many think the most important is the US dollar and the oil price we need to wake up and think CCI. The biggest risk factor today is our CCI. The global economy is falling! The prognosis for 2016 is adjusted down in many parts of the planet as I write this text. The national bank adjusts their interest down, and of course as you soon will understand they all the time say that this will be the last time. On top of this they the national banks indicates that at the END of 2017 the interest will go up again; who knows what will happen in 2 years of world economy. The oil sector is down (lowest since the recession) and many countries have problems due to this, and following it will be reduced investments in the oil sector for some years to come; estimated 20-25% down. Within this darkness it is expected that the oil price starts to climb soon. What we describe here is a variation; the markets go up and down. The most important is not these dramatic variations, but the consumer. If the consumer starts to buy less the world get into real problems. Remember that the CCI related to the consumer have been negative for 16 months – in a row. Private consume is the essence in most countries economy. When the consumer sees darkness in the world they go into a saving mode and stop spending their money. When money do not circulate the economy stops. It is estimated a reduction in personal consume on about 2%. This 2% might be two brutal percent for the economy. The world economy depends on a relative stability in the market for developing a trust among the consumers, because who would like to invest all their savings in a new car when they might lose their job next week. When consumers experience predictability, we might expect a relative stability in the world economy.