Shabbir Kayyumi
The Commodity Channel Index (CCI) is an oscillator originally developed in 1980 by Donald Lambert and featured in his book "Commodities Channel Index: Tools for Trading Cyclical Trends". The commodity channel index (CCI) is an oscillator used to identify cyclical trends in indices, ETFs, stocks, and commodities.
CCI measures the difference between a security's price change and its average price change. High or positive readings indicate that prices are well above their average, which shows strength. Low or negative readings indicate that prices are well below their average, which shows weakness.
This indicator measures the current price level relative to an average price level over a given period of time; however, the default period is taken as 20. The CCI can be adjusted to the timeframe of the market traded on by changing the averaging period.
Why buy 'ITC'?
There are a lot of trading strategies that put CCI into use. The below mentioned one is one of the most popular among the trading community which involves buying after bullish divergence formation and keeping low as a stop loss for higher movement. However, support of another indicator Bollinger Band can give additional support.
Recently, the stock logged a key low of Rs 135 and managed to close higher above the previous five days' high indicating bulls are active on lower levels and strong buying is emerging below Rs 140 mark. At the same time, CCI traded below -250 which is called as oversold or reversal levels and the possibility of bouncing back towards neutral levels of 0 is very high. Prices traded lower but closed above lower Bollinger band with a big bullish candlestick pattern also suggest buying setup and prices can move towards the middle band of Bollinger Band.
Moreover, CCI placed a higher low compared to earlier low, forming bullish positive divergence which implies bottoming out process and it suggests buy on dip strategy. Currently, the ITC is going through this setup and we expect higher price movement towards resistance zone standing around Rs 199-210 levels in the coming days.
Figure .1. CCI divergence and Buy signal on ITC
Buy Signal
1.> Recent CCI gave a breakdown and published swing low around Rs 135 levels.
2.> After marking low of (-400), CCI is retracing towards mid-line standing around 0 marks.
3.> Strong bullish candle formation near buying zone has given us confirmation of trend reversal in short term.
4.> Short term moving average 20 DMA placed around Rs 182 levels, suggesting prices can retrace towards it.
5.> Decent volume participation while forming bullish candle has also given additional confirmation.
Profit Booking:-
Whenever price candle will be near the resistance line which is near Rs 199 levels.
Stop Loss:-
The entire bullish view negates on breach of the last two candles low and one should exit from the long position. In case of ITC it is standing around Rs 145 marks closing basis.
Conclusion
We recommend buying ITC Limited (ITC) around Rs 165-160 levels with a stop loss of Rs 145 for higher targets of Rs 199 and Rs 210 levels as indicated in the above chart.
The author is Head - Technical Research, Narnolia Financial Advisors Ltd.
Disclosure: Narnolia Financial Advisors/Analyst (s) does/do not have any holding in the stocks discussed but these stocks may have been recommended to clients in the past. Clients of Narnolia Financial Advisors Ltd. may be holding aforesaid stocks. The stocks recommended are based on our analysis which is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report.
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