Composite Index Divergence Indicator

The Composite Index Divergence Indicator tool provides a comprehensive momentum oscillator that automatically identifies regular and hidden divergences between price action and momentum. By combining Constance Brown's Composite Index with automated divergence detection logic, it helps traders spot potential trend reversals and continuations.

Usage

The tool is primarily used to identify market turning points through price/momentum discrepancies. Users can look for the following signals:

• Regular Bullish Divergence (R): Occurs when price makes a lower low but the oscillator makes a higher low, suggesting a potential upward reversal.
• Regular Bearish Divergence (R): Occurs when price makes a higher high but the oscillator makes a lower high, suggesting a potential downward reversal.
• Hidden Bullish Divergence (H): Occurs when price makes a higher low but the oscillator makes a lower low, suggesting trend continuation.
• Hidden Bearish Divergence (H): Occurs when price makes a lower high but the oscillator makes a higher high, suggesting trend continuation.

The "Pivot Lookback" settings allow users to adjust the sensitivity of the pivot detection, while the "Range" settings define the lookback window for comparing these pivots.

Details

The indicator is based on Constance Brown's Composite Index, which was designed to overcome the limitations of the Relative Strength Index (RSI), specifically its tendency to flatten in trending markets. The Composite Index formula integrates a momentum component of the RSI with a Short-Term Simple Moving Average (SMA) of a shorter-period RSI.

The divergence logic compares the peaks and troughs (pivots) of the price action against those of the calculated Composite Index. It includes two additional SMAs (Fast and Slow) plotted over the oscillator to provide further context on momentum direction and trend strength.

Settings

• Use Body Not Shadow: When enabled, the script uses closing prices instead of high/low wicks for divergence calculations.
• Pivot Lookback Right/Left: Determines the number of bars required to the right and left of a point to confirm it as a pivot high or low.
• Max/Min Lookback Range: Defines the maximum and minimum distance (in bars) allowed between two pivots to qualify for a divergence.
• Plotting Options: Toggle visibility for Regular Bullish, Hidden Bullish, Regular Bearish, and Hidden Bearish signals.
• RSI Parameters: Adjust the RSI length, momentum length, and MA length used in the Composite Index calculation.
• SMA Parameters: Configure the lengths for the fast and slow moving averages applied to the oscillator.

FAQ

How do I interpret the "R" and "H" labels?

"R" stands for Regular divergence, which typically signals a reversal of the current trend. "H" stands for Hidden divergence, which often suggests that the current trend is likely to continue.

Can I set alerts for these signals?

Yes, the script includes built-in alert conditions for all four types of divergences (Regular Bullish, Hidden Bullish, Regular Bearish, and Hidden Bearish).

How can I access the Composite Index Divergence Indicator?

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