CCI Indicator — 2 Ways to Use CCI to Hunt for Momentum

The CCI indicator is an excellent way to hunt down and identify stock market momentum trades. Discover why the CCI is one of CMT AJ Monte's favorite indicators below.

Justin Nugent

This article was last updated on 01/17/2023.

The CCI indicator is a favorite technical indicator of Market Rebellion’s lead technical analyst, AJ Monte. If you ever catch one of AJ’s market reports, a webinar where AJ’s breaking down the charts, or one of his services, you’ll find that the CCI indicator is one of just a few indicators fixed permanently to his screen. 

But what exactly is the CCI indicator? Inside this article, we’ll be covering the nuts and bolts — what the CCI indicator is, where it came from, what it’s used for, and then we’ll talk about how our technical analysts use it to predict stock market momentum.

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What is the CCI Indicator?

The CCI (Commodity Channel Index) indicator is a technical analysis tool that is used to identify overbought and oversold conditions in a market. In the GIF above, AJ is identifying an overbought CCI — one that is above the red line (the red line signifies a reading of +100 — more on that later). The CCI was originally developed for use in the commodity markets, but is now commonly used in stock, forex, options, and crypto.

The CCI indicator is calculated using the following formula:

CCI = (Typical Price – 20-period SMA of Typical Price) / (0.015 x Mean Deviation)

Where Typical Price is the average of the high, low, and closing prices, and the Mean Deviation is the average deviation of the Typical Price over a specified number of periods (usually 20).

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How to Trade Using the CCI Indicator

The CCI is a technical analysis tool used primarily by momentum traders. For options traders, who are able to make money on the long and the short side, the CCI provides two key ways for traders to speculate on stock market moves: Identifying overbought & oversold conditions, and identifying trend changes through bullish & bearish divergences. 

Oversold and Overbought Conditions

The CCI indicator calculates a value that oscillates around zero. Values above +100 (that’s the red line from the video above) are considered overbought, while values below -100 (that’s the green line from the video above) are considered oversold. Simply put, when the CCI crosses above +100, it is a signal to sell, and when it crosses below -100, it is a signal to buy. 

If this sounds similar to the way RSI works — that’s right. The RSI, or the relative strength indicator, works in a very similar way, where readings of over 70 are considered overbought, and readings of under 30 are considered oversold. Though they may read similarly, they are calculated differently, display differently, and pair well together.

How to Identifying Divergences 

The CCI indicator can also be used to identify trend changes by looking for divergences between the CCI and the underlying market. A bullish divergence occurs when the CCI is making higher lows while the market is making lower lows, and a bearish divergence occurs when the CCI is making lower highs while the market is making higher highs.

In the example GIF above, the CCI is beginning to hinge lower — no longer making “higher highs” even as the market continues to press higher. This “divergence” identifies the separation between what the market is doing on the surface and the mechanics of what’s happening underneath the surface.

Don’t Let the Indicators Trick You With a False Positive

One of the advantages of the CCI indicator is that it can be used in any market, on any security, and on any time frame, to hunt for momentum. However, as with all indicators, it should be used in conjunction with other forms of analysis, such as fundamental and chart analysis, for more accurate results. 

For instance, CMT AJ Monte famously uses his 7-point checklist to identify trading set-ups — and signals from the CCI are just one of those points. No matter what other indicators you lean on, it’s important that you have a few more tricks up your sleeve to be sure that what you’re seeing isn’t a false positive.

At the same time, the late Ron Ianieri has frequently warned traders about avoiding “analysis paralysis” — a quirky term Ron coined for traders who rely on too many indicators, or indicators that are very obscure. The thesis here is that one should have a small handful of indicators and technical tricks that are well-known by other market participants, to rely on when crafting trade set-ups.

The Bottom Line: CCI is a Useful Tool, but Not the Only Tool

In summary, The CCI (Commodity Channel Index) indicator is a technical analysis tool that can help traders identify overbought and oversold conditions and trend changes in the markets. 

It’s calculated using a simple formula that compares the current price to an average over a specified number of periods. It can be used in any market, and in any time frame, but should be used in conjunction with other forms of analysis for more accurate results.

Want to see how AJ Monte uses the CCI and other technical indicators first hand? Try out AJ’s Options Essential. AJ Monte gives multiple option trade ideas every week, and each trade idea comes with a detailed, concise video explaining the thesis, the technicals, and why he’s doing what he’s doing.

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