Pearson's R Convergence Divergence

28 maj 2023

This script calculates the convergence divergence and breakouts from the deviations for a fast and slow linear regression slope.

This can be used to predict major market moves before they happen.

For users familiar with MacD, the blue line is similar to the MacD line and the orange line the signal.

The difference is this is not a moving average comparison but a comparison between Pearson's R values.

• -0.1 (positive direction)
  
• 0.1 (negative direction)
  

This is why the colors look inverse for a typical MacD.

How to use this:

The idea is that when both trends converge in the 0.8 or -0.8 range and you see a breakout cross occur on either line then the price has a high likelihood of reversing its current trend.

If you see a green cross it means the top of the linear regression for the 'fast' or 'slow' linear regression deviation was broken by the current price. This can signify that upward movement is coming soon.

On the flip side a red cross means the bottom of the linear regression for the 'fast' or 'slow' linear regression deviation was broken by the current price. This can signify that downward movement is coming soon.

These crosses mean a lot more if the pearson's R value is already maxed out near 0.8 or -0.8.

This indicator works because the more sure a trend becomes the more likely it is to break as more traders see the pattern.

The histogram colors do not mean much being 'red' or 'green', what you want to look for is when the histogram starts to approach the 0 mark. This signifies that both linear regression trends are about to reach their peak before reversing trend. So don't confuse this with how you might read the MacD even though it looks very similar. The histogram sloping towards the 0 line will give you a clue how long it might take before the reversal occurs.

Please PM me if you have any questions, and enjoy!