As the chart below shows, the Commodity Channel Index (CCI) has been providing some excellent buy and sell signals for those trading the FTSE.
Developed by Donald Lambert the CCI was first introduced in the October 1980 issue of Commodities magazine (now known as Futures magazine). The CCI is useful for identifying market trends, not only in commodities but also equities and currencies. It is also very good at identifying extreme conditions, i.e. overbought or oversold. The CCI measures the current price level relative to an average price level over a given period of time meaning that CCI is high when prices are far above their average and low when prices are far below their average.
The CCI can be adjusted to the timeframe of the market being followed by changing the averaging period. Here I have set the averaging period to 25 days.
A trader could buy the FTSE 100 when the CCI moves back above 200 (the green line) and sell it when the CCI dips back under 100 (the red line). It’s by no means perfect as twice in the past six months it has issued back to back sell signals but it’s still a very useful indicator.