Stock Diamond - Technical Analysis Education

Please note that we have used historical data. These examples are for educational purposes only.

Commodity Channel Index & Price and Volume Trend

In this issue of the ChartFilter newsletter we'll look at a couple of useful, complimentary indicators; the Commodity Channel Index (CCI) and Price and Volume Trend (PVT).

We're experiencing extremely volatile markets during the first days of the new Millennium! The Dow is up 300 points one day and down 250 the next. Every move seems to be an overreaction to some new economic data, earnings expectations or unsubstantiated rumour.

Oscillators are useful technical indicators during tumultuous times. As John Murphy writes, "The oscillator provides the technical trader with a tool that can enable him or her to profit from these periodic sideways and trendless market environments. The oscillator can also warn that a trend is losing momentum before that situation becomes evident in the price action itself. Oscillators can signal that a trend may be nearing completion by displaying certain divergences."

The Commodity Channel Index is an oversold/overbought oscillator designed to identify the beginning and the end of commodity market cycles by Donald Lambert. It has also proven effective for other markets.

The Price and Volume Trend is a volume indicator. It plots a cumulative total of volume adjusted according to relative changes in closing prices. It is similar to  On Balance Volume (OBV).

By using the two indicators together we have the benefit of an oscillator as well as an indicator that incorporates volume data. I find they work well together in providing overbought and oversold signals.

CURRENT TRENDS - Learning from the S&P 500

The S&P 500 has been in the same turbulent waters over the past few months as the other leading indices. The S&P has been in a strong downtrend since September 2000. It looks like PVT is offering some early signs of a possible oversold market, and at least a short-term trend reversal. Will CCI offer confirming signals...? Let's take a look at the current chart.

In the chart above we can see that PVT has made a sharp drop to the bottom of its chart. Let's take a look at some historic charts to see what this signal can tell us... The chart below shows the S&P in 1998, and illustrates the signal we're looking for with CCI & PVT working in partnership.

The CCI & PVT signals

What followed in this market after this oversold signal was given? Take a look at the chart below:

What's the lesson? When both PVT and CCI drop sharply in unison, you have a strong oversold signal, and a good likelihood of at least a short-term trend reversal, and likely something long-term. Please note that this is not the typical interpretation of PVT (although it is for CCI), however, I've found this combination to be very useful in volatile markets.

TIPS & TECHNIQUES - Using CCI & PVT

CCI compares the current mean price with the average mean price over a period of usually 20 days. As CCI moves upwards towards +100, it indicates the price is increasingly high compared to average prices. As the CCI drops towards -100, it indicates that the price is increasingly low compared to average prices.

PVT is calculated by adding a percentage of the volume when prices close up and subtracting a percentage of volume when the prices close down. The amount of volume added or subtracted to the PVT is relative to the amount that prices rose or fell compared to the previous day's close.