Technical Analysis Workshop Series. Session Eight Commodity Channel Index

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Lindsey Chase
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1 Technical Analysis Workshop Series Session Eight

2 DISCLOSURES & DISCLAIMERS This research material has been prepared by NUS Invest. NUS Invest specifically prohibits the redistribution of this material in whole or in part without the written permission of NUS Invest. The research officer(s) primarily responsible for the content of this research material, in whole or in part, certifies that their views are accurately expressed and they will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this research material.

3 DISCLOSURES & DISCLAIMERS Nothing in this research material constitutes a representation that any investment strategy or recommendation contained herein is suitable or appropriate to a recipient s individual circumstances or otherwise constitutes a personal recommendation. It is published solely for information purposes, it does not constitute an advertisement and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. No representation or warranty, either expressed or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein. The research material should not be regarded by recipients as a substitute for the exercise of their own judgement. Any opinions expressed in this research material are subject to change without notice.

4 Agenda Introduction To commodity channel index Q&A

5 Introduction to channel index PIVOT POINTS S

6 Introduction Originally created to identify cycles in Commodities Creator Donald Lambert Can also be used for stocks and the forexmarket

7 Reason behind the creation Lambert believed that every commodity or stock moves in cycles High and low points are established within a fixed period One cycle ( Time from high to low)

8 Definition An oscillator used in technical analysis to help determine when an investment vehicle has been overbought and oversold. The, first developed by Donald Lambert, quantifies the relationship between the asset's price, a moving average (MA) of the asset's price, and normal deviations (D) from that average.

9 Calculation CCI = (Typical Price - 20-period SMA of TP) / (.015 x Mean Deviation) Typical Price (TP) = (High + Low + Close)/3 Constant =.015

10 Calculation 0.15? Scaling constant, to ensure approx 70%-80% of CCI values fall between 100 and -100 % also depends on periods Longer period more stable (More values falling within the band of 100 and -100) Shorter periods more volatile Averaging/smoothing

11 Calculation Mean Deviation Ssubtractthe most recent 20-period average of the typical price from each period's typical price. Take the absolute values of these numbers. Sum the absolute values. Divide by the total number of periods (20).

12 Excel

14 Timing trades

15 Determining time interval Time interval plays crucial role in enhancing accuracy of the CCI Prediction of cycle through moving averages Thus, more attuned MA amount is to cycle, the more accurate the average Default timing 20 More accurate interval will reduce occurrence of false signals

16 Determining time interval Steps: Open up the stock's yearly chart. Locate two highs or two lows on the chart. Take note of the time interval between these two highs or lows (cycle length). Divide that time interval by three to get the optimal time interval to use in the calculation (1/3 of the cycle).read more:

17 Oct 6-Aug 9, approx 225 days, 1/3= 75

18 Application Lambert recommends 1/3 cycle time 30 day cycle, use 10 day for the CCI calculation

19 CCI measures the difference between a security's price change and its average price change. High positive readings indicate that prices are well above their average, which is a show of strength. Low negative readings indicate that prices are well below their average, which is a show of weakness.

20 The (CCI) can be used as either a coincident or leading indicator. As a coincident indicator, surges above +100 reflect strong price action that can signal the start of an uptrend. Plunges below -100 reflect weak price action that can signal the start of a downtrend.

21 As a leading indicator, chartists can look for overbought or oversold conditions that may foreshadow a mean reversion. Similarly, bullish and bearish divergences can be use to detect early momentum shifts and anticipate trend reversals.

22 Leading indicator Leading indicators are designed to lead price movements. Most represent a form of price momentum over a fixed lookback period, which is the number of periods used to calculate the indicato

23 Leading indicator Many leading indicators come in the form of momentum oscillators. Generally speaking, momentum measures the rate-of-change of a security's price. As the price of a security rises, price momentum increases. The faster the security rises (the greater the period-over-period price change), the larger the increase in momentum. Once this rise begins to slow, momentum will also slow. As a security begins to trade flat, momentum starts to actually decline from previous high levels

24 Application Movement across +100 & -100 Out of Normal price action Over+ 100, signal strong uptrend Below-100, Signal strong downtrend Bearish/Bullish Filters CCI favoursbulls when postiveand Bears when negative Risky to use simple line cross over: whipsaws Wait for more obvious signals, above +100 Lagged entry, reduced whipsaws

25 Whipsaw A condition where a security'sprice heads in one direction, but thenis followed quicklyby a movement in the opposite

27 Overbought/oversold

28 Overbought/oversold +100 overbought, -100 oversold Identify sideways market-look at MA, relatively flat, price oscillating around MA Identify Overbought CCI with divergence Look for cross down through + 100, moving towards typical price

30 Overbought/oversold Identifying overbought and oversold levels can be tricky with the (CCI). Theoretically, there are no upside or downside limits. This makes an overbought or oversold assessment subjective securities can continue moving higher after an indicator becomes overbought. Likewise, securities can continue moving lower after an indicator becomes oversold.

31 Overbought/oversold The definition of overbought or oversold varies for the (CCI). ±100 may work in a trading range, but more extreme levels are needed for other situations. ±200 is a much harder level to reach and more representative of a true extreme. Selection of overbought/oversold levels also depends on the volatility of the underlying security. The CCI range for an index ETF, such as SPY, will be usually be smaller than for a most stocks, such as Google.

33 Bullish/bearish divergences

34 Bullish/bearish divergences Divergences signal a potential reversal point because directional momentum does not confirm price. A bullish divergence occurs when the underlying security makes a lower low and CCI forms a higher low, which shows less downside momentum A bearish divergence forms when the security records a higher high and CCI forms a lower high, which shows less upside momentum

35 Bullish/bearish divergences Be careful of strong trends Divergence can be misleading A strong uptrend can show numerous bearish divergences before a top actually materializes. Conversely, bullish divergences often after appear in extended downtrends.

36 DMI Directional movement can be used on its own or as a filter 2 lines are generated for DMI study +DI -DI Measures positive (upward) movement Measures negative (downward) movement

38 Trendlinebreak

39 Trendline break Identify trend-ma, e.gma slope down, only take trendline breaks on the downside Draw trendlineon CCI, connects lows on CCI Enter at break of CCI trendline CCI Trendlinebreak earlier allows earlier entry than break on price, with confirmation Lead to higher profits

41 Additional Add in filters like a MA line to figure out the general direction of the trend, helping you choose between long and short plays

42 Conclusion CCI is a versatile momentum oscillator that can be used to identify overbought/oversold levels or trend reversals. The indicator becomes overbought or oversold when it reaches a relative extreme. That extreme depends on the characteristics of the underlying security and the historical range for CCI.

43 Conclusion Volatile securities are likely to require greater extremes than docile securities. Trend changes can be identified when CCI crosses a specific threshold between zero and 100. use CCI in conjunction with other indicators or price analysis. Another momentum oscillator would be redundant, but On Balance Volume (OBV) or the Accumulation Distribution Line can add value to CCI signals.

45 THANK YOU! TECHNICAL FM & BC MODEL ANALYSIS DOW THEORY Q & Q A & A

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Technical Analysis Workshop Series Session Three DISCLOSURES & DISCLAIMERS This research material has been prepared by NUS Invest. NUS Invest specifically prohibits the redistribution of this material