Average True Range (ATR), Commodity Channel Index (CCI), and Relative Strength Index (RSI) are all technical analysis indicators. Unlike fundamental analysis, a form of security analysis that makes stock purchases dependent on the value and financial health of the underlying business, technical analysis focuses solely on the price movements of the actual stock. Technical analysis indicators are formulas derived from market data such as stock price and the volume of shares being sold over a certain period of time. These indicators are used to identify industry-related trends in price movements, momentum and volatility.
ATR is one of the technical analysis indicators that were developed to calculate volatility in the commodity industry. Volatility is the measure of the changes in a stock or commodity's price over time. High volatility values indicate that prices fluctuate often and show the potential for tremendous losses or gains in the short term. Generally, prospective investments with volatility measurements higher than those in comparable commodities or the market as a whole are regarded as risky.
Commodities are products or resources that consumers purchase based on price rather than brand identification or product differentiation. Oil, gasoline, silver, and orange juice are examples of commodities. Since commodities are price-dependent, changes in pricing due to wars in oil territories, worker strikes or natural disasters that hurt crop production impact supply or demand and cause wild swings in commodity prices on the open market.
The ATR accounts for volatility in the commodity industry by subtracting the higher of the current day's high price and the previous day's closing price from the lower of current day's low price or the previous day's closing price. This information is tracked over a 14 day period. Those figures are then averaged. Commodities selling higher than the ATR are to be sold, those selling lower are to be bought.
The CCI is a part of the group of technical analysis indicators used to recognize changes in commodities and stocks in cyclical industries where the supply and demand for products vary throughout the year. It compares the current price level to the average price level over a certain period of time. Results higher than industry or market standards suggest that commodity prices are selling above their averages; this may signify a peak in prices and cause traders to sell. Negative or lower figures indicate that commodity prices are selling below their average, which may suggest a buying opportunity or industry recession.
RSI is a common technical analysis indicator that assesses the momentum of a commodity or security's selling price. Momentum traders seek to purchase stocks or commodities that are increasing in price and have a high volume of sellers on the open market. Securities with falling prices and trade volume are typically sold by momentum investors.
Traders use the RSI to identify overbought and oversold commodities or stocks. Overbought indicates that market prices are currently too high and likely to decline in the short term. This is usually due to sharp advances in price over a short period of time. Oversold, on the other hand, signifies that a security's price is low enough to indicate a rally.
To find the RSI, traders divide the number of price gains by the number of downward price movements over a certain period of time. An RSI above 70 suggests that there are more buyers than sellers in the market and the stock or commodity has been overbought. Followers of technical analysis indicators usually sell on this information. An RSI calculation below 30 may be evidence of overselling and prompt traders to buy.