by Alex Martin

Overview of CCI

The Commodity Channel Index, CCI, was designed to identify the beginning and the end of commodity market cycles by Donald Lambert. CCI is calculated by measuring the current price (the average of the high, low, open, close) againstviation with the average of the last period (5, 10 15, bars). The indicator is an oscillator and is typically charted below the price/time chart. The indicator fluctuates between -100 to 100. High values indicate that the stock appears higher than the average of the last period. Low values indicate that the stock has a low price relative to the average of the last period.

CCI provides a warning of overbought and oversold markets when the line crosses the +100 or the -100 levels. The actual buy or sell signal is usually provided, however, when the line then crosses back over the +/-100 level. Divergence from the price is also a good warning of a possible correction or trend reversal. Zero-line crossings can often provide a confirmation buy/sell signal or a complimentary warning of a change in trend.

In this newsletter we will be looking for "ghost" patterns. A CCI ghost (developed by Ken Wood of woodiescciclub.com) is the same as a head and shoulders pattern.

Head and Shoulders pattern

For the Sell signal (or short side ghost) the pattern appears as follows:

For a Buy signal (or inverted ghost) the pattern appears as follows:

The reasoning behind talking about CCI ghost patterns is that it will help eliminate screened results. When looking at what the stock screener has returned, apply the CCI to the charting software and look for ghost patterns, if one exists, this stock could be of value to you.

Setting up the Screen

Exchanges:

This screen works better one exchange at a time, so in this example I chose the NYSE.

Technicals:

CCI crosses the -100 line within the last 10 trading days.

Fundamentals:

The fundamentals were chosen to specify only a price and volume range. This helped reduce the list of results as well as ensuring high volume stocks. The conditions are as follows, last trading day volume greater than or equal to 100 000, close prices between 1 and 20.

Results:

Looking at the results, it is useful to include other indicators or fundamentals to reduce your results.

This is one of the stocks from the results list which may have potential (please note: at this point I have no information about this company, if I see a pattern form in the CCI, it would be prudent to get the necessary corporate information before making any decision. This pattern shows potential uptrend, it does not account for news events or unforseen events).

In this case I applied a 14 day period in the CCI. Depending on your trading strategy or preference, altering the period will make the CCI more or less sensitive to short term movements. The longer the period, the less sensitive the CCI becomes to short moves, it is wise to practice using different time frames until you find one that suits you.