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Technical Indicators: C (part 2)
Chande Momentum Indicator
The Chande Momentum Indicator is closely related to other indicators such as the Relative Strength Index. It differs from momentum indicators such as RSI and Stochastics by using information from both up and down days.
The usual method of interpreting the Chande Momentum Indicator is to look for overbought and oversold conditions. Generally the overbought level is at +50 and the oversold level at -50. These levels are approximate to the 70/30 levels on the Relative Strength Index. Either condition is a strong indicator of a change in the trend of buying/selling.
The CMI is also useful to spot trends, used in a similiar manner as the Vertical Horizontal Filter (VHF). The higher the Chande Momentum Indicator the stronger the trend. Buy when a long period CMI crosses above the short period moving average of the CMI. Sell at the converse.
This indicator was created by Tushar Chande and is described in his book The New Technical Trader.
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Commodity Channel Index (CCI)
The CCI or Commodity Channel Index is a means by which the variation of a security's price is calculated from its statistical mean.
Much like the Average Directional Movement Index, the CCI can help give a valuable measurement of the overall trendiness of a market. The faster the CCI is accelerating, the more strongly the market is trending. While it is perhaps mathematically possible for the CCI to move upward while the market does not, this is unlikely.
Typically oscillating between +100 and -100, a CCI reading above +100 implies an overbought condition (and a pending price correction) while readings below -100 imply an oversold condition (and a pending rally).
Keep in mind that the CCI can provide important information to a trader even when it is not giving entry signals. If a market stays inside the +/-100 range most of the time, it's demonstrating the absence of a trend, so it might be best to avoid that market or use a countertrend trading strategy.
Despite its name, the CCI can be used effectively on any type of security, not just commodities.
Commodity Selection Index (CSI)
As an indicator of momentum, the Commodity Selection Index, or CSI is designed to help select commodities suitable for short-term trading. Designed for short-term traders who can handle the risks associated with highly volatile markets, a high CSI rating indicates that the commodity has strong trending and volatility characteristics. These characteristics are brought out by the Directional Movement factor in the calculation - the volatility characteristic by the Average True Range factor.
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CSI creator Welles Wilder describes his focus to trading commodities with high CSI values. As these commodities are highly volatile, they have the potential to make the quickest return in the shortest time.
The CSI is based upon the ADXR component of the Directional Movement Indicator. For full calculation details on the Commodity Selection Index, see Wilder's book "New Concepts in Technical Trading Systems."
Correlation Analysis
Correlation Analysis compares a stock against either an indicator or another stock and illustrates how similar/dissimilar they are to one another.
You can use correlation analysis in two basic ways: to determine the predictive ability of an indicator or to determine the correlation between two securities.
When comparing the correlation between an indicator and a security's price, a high positive coefficient (more then +0.70) tells you that a change in the indicator will usually predict a change in the security's price. A high negative correlation (less than -0.70) tells you that when the indicator changes, the security's price will usually move in the opposite direction. A low (close to or equal to zero) coefficient indicates that the relationship between the security's price and the indicator is not significant.
Correlation analysis is also valuable in gauging the relationship between two securities. Often, one security's price "leads" or predicts the price of another security. For example, the correlation coefficient of gold versus the dollar shows a strong negative relationship, an increase in the dollar usually predicts a decrease in the price of gold.
CP Volumentum Trend
The CP Volumentum Trend indicator dynamically integrates price and volume into a single indicator. The indicator responds to a divergence in volume from the norm, taking advantage of the fact that volume generally increases significantly at market turning points.
Volume divergence is evaluated against current price action and plotted as both a trend and a strength indicator. The indicator identifies high probability trading zones and automatically adapts to changes in volatility. The strength indicator is used to confirm the conviction behind the Volumentum Trend.
You can learn more about this indicator at Volumentum.com.
Cumulative Volume Index
The Cumulative Volume Index uses market momentum to illustrate money flows in and out of the market. It is calculated by subtracting the volume of declining stocks from the volume of advancing stocks and adding this resulting value to a running total.
The Cumulative Volume Index and On Balance Volume (OBV) are quite similar in some respects as both were designed to show if volume is flowing into or out of the market. The difference rests in the Cumulative Volume Index using the actual up- and down-volume for the New York Stock Exchange unlike with the OBV which assumes that all volume is up-volume when the stock closes higher and that all volume is down-volume when the stock closes lower as up-volume and down-volume is not available for individual stocks.
One useful method of interpreting the CVI is to look at the overall trends. The CVI will show if there has been more up-volume or down-volume and how long the current volume trend has been in effect.
Also, look for divergences that develop between the CVI and a market index. If the market index is showing a new high while the CVI fails to react in kind, expect the market to correct itself to confirm the underlying story told by the CVI.
Remember, as the CVI always starts at zero, the numeric value of the CVI is of little importance. What is important is the slope and pattern of the CVI.
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