The Commodity Channel Index calculates the difference between the current typical price (average of high, low, and close) and a moving average of that typical price, then normalizes the result by the mean absolute deviation. The output is an unbounded oscillator that moves around zero, with +100 and -100 as the conventional threshold levels.

A reading above +100 means price has moved more than one standard deviation above its recent average — statistically stretched to the upside. Below -100 means the same on the downside. This doesn't guarantee an immediate reversal, but it identifies when price has moved unusually far from its norm. Strong trends can ride CCI at extreme readings for extended periods. The levels are a signal to pay attention, not a mechanical trigger.

CCI also reveals divergence. If price makes a new high but CCI makes a lower high, the move lacks statistical confirmation — the price extension is shrinking relative to recent history, and the rally may be losing its underpinning. CCI was originally designed for cyclically trending commodity markets, but it applies across any asset where mean reversion is relevant.