Trend identification.
CCI was originally designed to identify long-term trend changes. When the CCI moves from below zero to above +100, it signals a new bullish trend.
Conversely, a move from above zero to below -100 signals a new bearish trend.
Overbought vs. Oversold.
- Above +100: Market is overextended to the upside, but often signifies the start of a strong trend.
- Below -100: Market is overextended to the downside.
- Extreme readings (+200/-200) often precede a sharp correction.
- Traders often look for the indicator to cross back inside the 100 levels as a signal to take profit.
Divergence signals.
Like all oscillators, CCI divergence is a powerful 'heads-up' for a trend reversal. If price is pushing higher but the CCI is dropping, the trend lacks conviction.
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