CCI is like what I use on the S&P for evaluation of changes from the norm, in the over all market sentiment. I call it the rubber band effect, using moving average though. The thought is when extreme levels are reached, reversal or correction can be expected, back to the norm.
CCI is a trend indicator. It is an oscillator and it indicates over bought and over sold positions in any chart evaluated. Some publications call it a momentium indicator, which I disagree with. Oscilator indicator normally do show strength to trend, or momentium, but in CCI case, IMO the math is based on trend and It should indicate trend and when trend reversal can be expected, more then the momentium behind the trend.
All indicators will show more then 1 thing within it's graph. And stepping back to basics, CCI is designed to see trend, more then strength or entry/exit, while it does offer those indications also.
So yes a reversal in price direction could be expected when any oscilator indicator reaches extreme. But one should not trade on that alone. Trend is a support indication, not enter/exit one.
IMO this TA indicator should be used to support your entry decision, once a reversal occures. Not create a buy signal at over bought or sold. I feel the same about all oscilators in general. Just like I do not recommend buying before action is seen in chart patterns. Buying an over bought or sold TA oscilator can create early entries or exits before reality sets in. There is a center line with all oscilator graphs. That is usually the entery/exit point.
