TIP OF THE WEEK – Using the CCI to help time buy and sell decisions

An indicator that shows if a stock, commodity, or ETF is overbought or oversold

Jason Brizic

July 15, 2011

Developed by Donald Lambert and featured in Commodities magazine in 1980, the Commodity Channel Index (CCI) is a versatile indicator that can be used to identify a new trend or warn of extreme conditions. Lambert originally developed CCI to identify cyclical turns in commodities, but the indicator can successfully applied to indices, ETFs, stocks and other securities. In general, CCI measures the current price level relative to an average price level over a given period of time. CCI is relatively high when prices are far above their average. CCI is relatively low when prices are far below their average. In this manner, CCI can be used to identify overbought and oversold levels.

To learn more about how the CCI is calculated and excellent examples read the rest of the StockChart.com chart school entry on the CCI.  It is available here: http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:commodity_channel_in

I perform fundamental analysis first to determine if a stock, ETF, or commodity is worth buying.  Then I use technical analysis to help time my buy or sell.  The CCI can help you make buy and sell decisions.  This also works with shorting stocks.

You can use the CCI to help spot price bottoms.  The best opportunities to buy often occur when the CCI is in the “red”.  That means a value of -100 or greater.  You can also use the CCI to help spot price tops.  The most opportune times to sell often occur when the CCI is in the “green”.  That means a value of +100 or greater.

I use the Commidity Channel Index when I create free charts on www.stockcharts.com.

Here are the steps I take to setup my charts in less than 10 seconds:

  1. Leave the Type of chart: set to SharpChart.
  2. Type in the ticker symbol and click Go.
  3. Change the Period to Weekly.
  4. Scroll down to Chart Attributes; change Size to Landscape.
  5. Check the following checkboxes: Full Quote, Price Labels,
  6. Uncheck the Log Scale checkbox.
  7. Scroll down to the Overlays area.  Change the one that says –None- to Bollinger Bands
  8. Scroll down to the Indicators area.  Change the one that says RSI to CCI

I used the CCI along with Bollinger Bands and the MACD indicator to time my purchase of gold in November of 2008.  Notice that the price of gold was deep in the “red” on the CCI indicator in late 2008.  I has risen steadily since 2008.  Look at all those “green” peaks.  The green peaks will continue until the Federal Reserve tightens monetary policy.  There will be a day to sell gold, but that day is likely years away because the Federal Reserve is not facing inflationary pressures yet.  But I disgress.  Let’s get back to the CCI.

Image001

3 year gold price chart: http://stockcharts.com/h-sc/ui?s=$GOLD&p=W&b=5&g=0&id=p21431362973

I recently wrote about AstraZeneca (AZN) as a potential high dividend stock worth buying.  AZN’s 3 year chart is very instructive on how the CCI could be used to help time stock purchases.

Image002

When was the best time to buy AstraZeneca stock in the past three years?  The answer is in March of 2009 when the US stock market was bottoming after the Panic of 2008.  The CCI was deep in the “red” at a value of over -200!  The MACD and Bollinger Bands confirm the bottom of AZN in April of 2009.  Just take a look at how often the price bottoms coincide with the CCI in the red.  Likewise, so many price tops are near the green CCI peaks.

This method is not foolproof.  The United States Natural Gas Fund ETF traded as UNG shows us how ignorance of the prerequisite fundamental analysis that Benjamin Graham advocated many years ago can lead you into investment peril if you only rely on technical indicators.

Image003

I’m going to analyze the fundamentals of UNG in the not too distant future.  This might not be the bottom.

For more tips, go here:

http://www.myhighdividendstocks.com/category/tip-of-the-week

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Published in: on July 16, 2011 at 9:28 am  Leave a Comment  

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