What is A Commodity Channel Index (CCI) and How Do I Read it?
The Commodity Channel Index used in technical studies to aid in the problem of overbought and oversold commodities.
It is said that in a certain situation, when the asset is trying to put the price of another asset to a point without proper basis in the original price, it’s then said to be overbought. It then affects the price of the commodity that is not overbought. When there is an upward movement in the asset for just a short period of time, then it is usually considered overbought.
Overbought commodities in the investment may not be good since it may cause surplus in the market. It is advised to the investors that before production, to make sure that the product is just enough for the household it serves. Although having stocks may be good, more than enough is already too much.
Oversold is when there is a serious fall down in the asset and it reaches even below the level where in its real price lies. This comes with the market’s reaction to panic selling. When there is panic selling, consumers tend to either grab the opportunity of having much commodities to choose from, or it may be that the commodity is not performing well that is why sellers try to sellout their possible stocks. But then, investors may have different opinions regarding the commodities that are oversold.
The CCI usually ranges above and below a zero line. It is overbought when the findings are above +100 and –100 are the oversold readings. In this case there is a possibility that a change in price of the commodity will happen.
When CCI is served together with other variations, it becomes useful mechanic that provides the investors good and quality information that helps them trace the movement of the prices.
It is important for investors to study and monitor the CCI so that they can avoid the oversold and overbought object in their business. One must make sure that what is enough is just enough and not what is enough is lacking, or what is enough has surplus.
With CCI, production of goods, services and other commodities for the consumer will reach at the right time and with the right quantity that will be enough for the consumption of the household. With its extreme usefulness to the traders, they could then avoid manual calculations of things regarding their commodities and this goes out with more technical analysis too.
That is why CCI is used not only in terms of commodity but as well as in the studies of currencies and equities.