Trade Leader Or Kahana explains the Zero Line Reject and Woodies CCI.
Woodie's Commodity Channel Index (CCI) is a great technical indicator that provides continuation and reversal patterns. The indicator can be implemented on all time frames. I use Woodies CCI from the hourly chart and all the way to the monthly chart although the inventor of the indicator, Ken Wood (aka Woodie) uses the indicator for trading on charts of just several minutes without viewing the price of the selected instrument.
Woodie's CCI is not the common form of CCI that is available in every MetaTrader4 (MT) trading platform. You can download the indicator from this link (provided as-is, use as your own risk) or from any number of trading sites.
I use two averages in Woodie's CCI, 50 CCI (Trend, slow) and 6 TCCI (Turbo, fast). Let's first understand how Woodie's CCI works. When the Trend CCI (50) crosses the Zero-Line (ZL) from the top to the bottom, 4 grey bars will be initially painted below the ZL, followed by a yellow bar that suggests a new trend is developing and then a red bar, which confirms the bearish trend of the selected instrument as there is a sequence of 6 bars below the ZL.
When the trend CCI crosses the ZL upwards (from below the ZL), 4 grey bars will materialize, a yellow bar and the sixth bar and onwards will be green that confirms the established uptrend of the selected instrument. As with any other indicator it is best to use Woodie's CCI with other indicators in order to refine the entries and other indications towards the trade.
I would like to clarify one of the most popular patterns in Woodie's CCI, 'Zero-Line Reject,' or in short ZLR. Zero-Line Reject is a pattern used to join the established trend of the market after a partial correction has taken place. In other words, joining the trend after a partial correction, which is also known as 'buy on dips' where traders join the uptrend after a bearish correction or 'sell on dips' where traders join the downtrend after a bullish correction.
Resumption of an uptrend: ZLR forms when the 50CCI is in the ZL region and rebounds sharply in a V-shape simultaneously to the 6TCCI, which turns up in a V-shaped recovery below the ZL close to -200. The pattern will be stronger if the V in both the 50CCI 6TCCI is big and very clear.
Resumption of a downtrend: ZLR forms when the 50CCI is in the ZL region and falls sharply in a reversed V-shaped movement and the 6TCCI, at the same time turns down in a reversed V-shaped movement above the ZL close to +200. The pattern will be stronger if the V in both the 50CCI and 6TCCI is big and very clear.
1) The odds of the first, second and even third ZLR being successful are significantly higher than the seventh or tenth ZLR. When the established trend remains for a substantial amount of time without a healthy correction, the next dip may be very aggressive.
2) If a ZLR forms when the 50CCI is in the -100/+100 region and the 6TCCI is in +100/-100 (opposing the 50CCI), it may not be the perfect ZLR. On many occasions the established trend may temporarily resume and the 50CCI will swiftly return to the ZL in order to renew the ZLR.
3) When a ZLR forms after the 50CCI traded above +200 or below -200 multiple times, the odds of a successful ZLR are slim.
ZLR Examples in the FX Markets
USDJPY, Hourly chart, 04.12.2013
This is a perfect ZLR. In the highlighted region, the 50CCI (in black) was at the ZL region and the 6TCCI (in blue) was near +200 and a perfect V was affirmed in both averages. This is a ZLR for short trades.
EURCAD, Daily chart, 11.06.2013
In the highlighted region a ZLR took place when the 50CCI (in black) was at the +100 region. Not the perfect ZLR, will usually supply a small price movement in the established trend.
AUDCAD, Monthly chart, 01.07.2010
This is a ZLR for going long. The 50CCI (in black) was at the ZL region while the 6TCCI (in blue) was at the -200 region. Sometimes you will see a "double" V formation. If the ZLR pattern has been invalidated as a V was not painted (as highlighted in the purple circle), it may be wise to continue monitoring both the 50CCI and 6TCCI since there are many occasions in which a "double" V confirms the ZLR.