The Commodity Channel Index (CCI) is calculated by first determining the difference between the mean price of a commodity and the average of the means over the time period chosen. This difference is then compared to the average difference over the time period (this factors in the commodity's own inherent volatility). The result is then multiplied by a constant that is designed to adjust the CCI so that it fits into a "normal" trading range of +/-100.

While the CCI was originally designed for commodities, the indicator also works very well with stocks and mutual funds.

There are two methods of interpreting the CCI:

Looking for divergences

A popular method of analyzing the CCI is to look for divergences in which the underlying security is making new highs while the CCI is failing to surpass its previous highs. This classic divergence is usually followed by a correction in the security's price.

As an overbought/oversold indicator

The CCI usually oscillates between +/-100. Readings outside these ranges imply an overbought/oversold condition.