Calculating the CMB Composite Index
RSI Chg = 9-period ROC of 14-period RSI
RSI Mom = 3-period SMA of 3-period RSI
Composite Index Line = RSI Chg + RSI Mom
Fast SMA Line = 13-period SMA of Composite Index Line
Slow SMA Line = 33-period SMA of Composite Index LineFirst, the 9-period rate of change is calculated for the 14-period RSI. Using the rate of change rather than the RSI itself allows the value to range outside the typical RSI boundaries.
Second, the 3-period simple moving average of the 3-period RSI is calculated. This adds a momentum component to the indicator value.
Finally, the values from the first two steps are added together to create the Composite Index.
There is no normalization built into this formula, as there is in Wilder’s traditional RSI. This means that the values can range outside of the 0 to 100 limits of traditional RSI. CMB Composite Index values can even be negative.
As mentioned earlier, the CMB Composite Index is plotted along with a faster and a slower SMA of the index. Brown recommends 13 periods for the faster and 33 periods for the slower, but these values can be adjusted to make them faster or slower, in order to meet your trading needs.
The parameters of the CMB Composite Index itself cannot be adjusted by the user.
Interpreting the CMB Composite Index
Use the CMB Composite Index to look for divergences that may signal an upcoming trend change; or MA crossovers that serve as buy and sell signals.
Divergences
As with RSI, divergences can be used to spot price moves that are no longer confirmed by momentum. Typically the CMB Composite Index is compared with traditional RSI to spot divergences. In this situation, the RSI functions as the “price” part of the divergence, and the CMB Composite Index is the momentum indicator.
In the example above, the RSI value of Microsoft (MSFT) is making higher highs, but this upward move is not confirmed by the CMB Composite Index, which failed to surpass its previous highs and is recording lower highs instead. This bearish divergence can indicate the end of an upward price move, and indeed, the price fell shortly after.
While the CMB Composite Index is typically compared with traditional RSI, it can be useful to look for divergences with price as well. In the example below, Visa’s price has been dropping throughout the month of November. The RSI is essentially flat, and the CMB Composite Index is recording mildly higher lows. In this case, the divergence between price and the CMB Composite Index is much more pronounced than the divergence between RSI and the index. The bullish divergence between V and its CMB Composite Index led to a price reversal in early December.
Of course, divergences are not enough to trigger a buy or sell signal; chartists will want to use this technique in conjunction with other confirming indicators.
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