Momentum Covenant Bias

The Momentum Covenant Bias indicator provides a multi-dimensional momentum pane designed to classify market conditions into constructive, defensive, balanced, or compressed states. It integrates several momentum and trend metrics to help traders identify whether momentum is actively participating in a price move, offering a timing layer to complement market structure analysis.

Usage

The Usage section describes how the script can be used to interpret market momentum and timing.

• Composite State Interpretation: The primary score indicates the current regime. Balanced states (near zero) suggest a lack of directional conviction, while impulse states (extreme values) suggest strong momentum participation.
• Signal Line Crossovers: Users should observe the relationship between the composite score and its signal line. A fresh separation between the two often signals a change in momentum momentum before absolute levels reach extremes.
• Compression Zones: The script identifies "low-energy" conditions. These zones explain periods where price may not be extending despite a directional bias, often preceding a breakout or expansion.
• Force-Overlay Scaffold: When a fresh momentum shift is confirmed, the indicator can project an optional TP/SL scaffold on the chart. This serves as a planning aid reflecting the current momentum volatility.

Details

The script's engine is built upon five core components:

• WaveTrend Timing: Uses the relationship between a main line and signal line to establish a rhythm for potential turning points.
• RSI Displacement: Evaluates RSI relative to its 50-level and its smoothed mean to distinguish between raw strength and persistent trend displacement.
• Normalized Trend Distance: Measures the price distance from a slow EMA baseline, normalized by ATR to ensure the output is consistent across different assets and timeframes.
• Compression Logic: Compares recent price ranges to a long-term baseline. A ratio below 0.85 triggers compression boxes, signaling a squeeze.
• Confirmed-Bar State Promotion: To prevent "repainting" or unstable triggers, the script focuses on confirmed bar states for its momentum signals.

Settings

Wave Engine

• Wave Channel Length: Sets the lookback period for the initial EMA channel.
• Wave Average Length: Determines the smoothing for the primary WaveTrend line.
• Wave Signal Length: Controls the smoothing of the WaveTrend signal line.

RSI Engine

• RSI Length: Standard lookback for the Relative Strength Index.
• RSI Smooth Length: Smoothing period for the RSI mean used in displacement calculations.
• RSI Displacement Band: Sets the sensitivity for how RSI distance from 50 is weighted.

Trend Engine

• Trend Fast/Slow EMA: Defines the two moving averages used to calculate trend distance and slope.
• ATR Length: Lookback for the Average True Range used for normalization and risk.
• Compression Length: Baseline period used to determine if current price action is compressed.

Momentum Scaffold

• Show Force Overlay Scaffold: Toggles the visibility of the on-chart TP/SL planning rails.
• Stop ATR Multiplier: Sets the distance of the stop-loss line based on current volatility.
• TP Ratios (1, 2, 3): Adjusts the Take Profit levels relative to the initial risk distance.

Display

• Show Dashboard: Toggles the top-right information panel.
• Show State Bands/Histogram/Background: Controls the various visual elements of the momentum pane.
• Show Compression/Impulse Boxes: Toggles the visual highlights for specific market energy states.

FAQ

How do I interpret the "Impulse" states in the pane? Impulse states (Bids or Offers) occur when the composite score exceeds ±35. These represent high-conviction moves where momentum and trend are aligned.

What causes a Compression Box to appear? A compression box appears when the recent price range is significantly smaller (less than 85%) than the historical average, suggesting the market is winding up for an expansion.

How can I access the Momentum Covenant Bias? You can get access on the LuxAlgo Library for charting platforms like TradingView, MetaTrader (MT4/MT5), and NinjaTrader for free.