CompositeIndex

🧠 Composite Index — RSI Reimagined for Precision Reversals

Referenced From?
Based on Constance Brown's thesis submitted in 2015 to fulfill requirements of "Master of Financial Analysis" (MFTA).

📌 OVERVIEW
The Composite Index (CI), designed by renowned technical analyst Constance Brown, is a refined version of the traditional RSI (Relative Strength Index) — engineered to solve its most frustrating flaw:

“RSI often gives false divergence signals due to its fixed 0–100 range.”

This indicator presents a non-bounded, momentum-weighted oscillator, which retains RSI’s familiarity, but removes its limitations.

The result?
A powerful, leading reversal tool that:

Detects hidden divergences

Avoids early or misleading RSI peaks

Anchors mean-reversion more effectively with dynamic bands

This version includes three operational modes, empowering traders to adapt it to trend, volatility, and reversal scenarios.

⚙️ COMPONENT BREAKDOWN
🔹 Composite Index Formula
The core CI formula is:

CI = Momentum(RSI1, N) + SMA(RSI2, M)
RSI1 = traditional RSI (default 14)

Momentum = recent change in RSI1

RSI2 = shorter RSI (default 3)

SMA = smoothing of RSI2 (default 3)

This blend captures:

Longer-term RSI directional shifts (momentum)

Short-term oscillator smoothing (SMA)

The resulting oscillator is unbounded, unlike RSI — allowing truer divergences.

🔹 Mode 1: Traditional
Plots the Composite Index

Optionally overlays:

Avg1: medium-term smoothing line (default 13)

Avg2: longer baseline trend reference (default 33)

Great for:

Manual divergence spotting

Trend reversal confirmation

Oscillator cross back strategies

🔹 Mode 2: Traditional + Bands
Adds ±2 standard deviation envelopes around Avg2

These act as dynamic overbought/oversold regions

Helps detect extreme deviation conditions

Great for:

Fade trades / scalps

Mean reversion signals

Volatility compression breakouts

🔹 Mode 3: Z-Score
Plots Composite Index as a Z-Score

Reframes CI as a statistically normalized range (e.g., ±2σ)

Adds zero-line and bands to define contextual extremes

Great for:

Probability-based edge finding

Quant strategies

Clean divergence against price or other indicators

💡 TRADING STRATEGY EXAMPLES
✅ Setup 1 — Reversal Divergence (Z-Score Mode)
🔹 Market makes lower low
🔹 CI (Z-Score) makes higher low
🔹 Z-Score crosses above -2 → Trigger entry

Interpretation:
CI detects momentum shift earlier than price.
Z-Score confirms oversold mean reversion.

Use case: Trend reversal scalp or swing entry.

✅ Setup 2 — Momentum Pullback Continuation (Traditional Mode)
🔹 CI pulls back to Avg1 or Avg2 from above
🔹 Price makes higher low
🔹 Composite bounces and resumes higher

Interpretation:
Avg1 acts like a dynamic "RSI 50" — trend continuation confirmation.

Use case: Buy-the-dip setups or stop-hunt re-entries.

✅ Setup 3 — Overextended Fade (Band Mode)
🔹 CI pushes beyond +2 std dev
🔹 Price starts to stall or form a reversal candle
🔹 CI rolls over while price is sideways/up

Interpretation:
Extreme momentum deviation resolved by price mean-reverting.

Use case: Short-term fade or reversion-to-VWAP setup.

✅ HOW TO USE IT
Goal Recommended Mode
Divergences - Z-Score / Traditional
Trend continuation - Traditional + Avg1/Avg2
Overbought/Oversold - TraditionalWithBands
Quant-normalized setups - Z-Score
Manual RSI replacement - Any mode

🎯 TIPS FOR POWER USERS
Combine CI with VWAP or anchored RSI for stronger confluence.

Use Avg1 crossovers as dynamic entry/exit triggers.

Overlay CI with price directly using overlay=true if you want to align levels visually.

Use in confluence with volume, structure, or liquidity zones.