SMT Divergence Strength Index

The SMT Divergence Strength Index indicator identifies pivot-based Smart Money Technique (SMT) divergence between a chart symbol and a reference asset while filtering for events with significant relative momentum. By combining structural pivot analysis with Z-score normalization, the tool helps traders distinguish between minor price mismatches and high-strength divergence events that suggest potential market reversals or imbalances.

Usage

The Usage section explains how to interpret the divergence signals and visual components provided by the script.

• SMT Detection: Bearish SMT is identified when the main symbol forms a higher high while the reference symbol forms a lower high. Bullish SMT occurs when the main symbol forms a lower low while the reference symbol forms a higher low.
• Z-Score Oscillator: The histogram columns represent the Z-score of the momentum spread. When the histogram turns color (exceeding the threshold), it indicates that the divergence is occurring during an unusually large relative movement between the two assets.
• Correlation Line: A Cyan line displays the correlation between the two symbols, providing context on whether the assets are behaving according to their typical relationship.
• Asset Pairing: For effective results, users should pair the main chart with a highly correlated (or inversely correlated) asset. Examples include:
  • Equities: NASDAQ vs. S&P 500 or Dow Jones.
  • Inverted Forex/Macro: EURUSD vs. DXY (using Invert Correlation).
  • Risk Proxies: SPX vs. VIX (using Invert Correlation).

Details

The script operates using a multi-layered approach to validation:

1. Structural Layer: Confirmed pivots on the main symbol act as the anchor points for comparison.
2. Statistical Engine: The script calculates the momentum spread between symbols and applies a Z-score normalization. This ensures that SMT labels only appear when the "dislocation" between the assets is statistically significant compared to a historical lookback period.
3. Inversion Logic: When "Invert Correlation" is enabled, the reference symbol's High/Low/Close data is transformed using reciprocal values (1/price). This allows inversely related markets to be analyzed within the same structural framework (e.g., treating a DXY rise as a "drop" to align it with a falling EURUSD).

Settings

Reference Data

• Reference Symbol (Pairing): The external asset used for divergence comparison.
• Invert Correlation?: Transforms the reference data into reciprocal values to allow comparison of inversely correlated assets.

Statistical Engine

• Pivot Left/Right: Sets the number of bars required to confirm a pivot high or low.
• Source: The price source used for pivot calculations (default is Close).
• Z-Score Lookback: The period used to calculate the mean and standard deviation for the momentum spread.
• Min Z-Score Threshold: The minimum statistical strength required to trigger an SMT label.

Visuals

• Non repaint mode: If enabled, labels appear on the confirmation bar. If disabled, labels are shifted back to the actual pivot bar for visual clarity.
• Show Divergence Line: Toggles the drawing of trendlines connecting the divergent pivots on the main chart.

FAQ

How do I access the SMT Divergence Strength Index?

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

Why do SMT labels appear several bars late?

The indicator relies on confirmed pivots. A pivot is only confirmed once the "Pivot Right" number of bars has closed, ensuring the high or low is valid and not repainting.

When should I use the Invert Correlation setting?

Use this when your reference asset is expected to move in the opposite direction of your main chart. For example, if trading BTCUSD and using DXY (Dollar Index) as a reference, enabling inversion allows the script to compare them as if they moved in the same direction.