Chapter | 12
THE COMPOSITE INDEX

Let’s get the criticism of the first edition right out of the picture up front. What’s the formula?!

The Composite Index will diverge where the RSI often fails to warn a trend reversal is approaching. The reason the Composite will pass on the warning is that it has a momentum indicator imbedded within the RSI formula. In English the steps you need are the following:

Step 1: create a 9-period momentum indicator of a 14-period RSI. Yes, it is momentum on RSI, not price. This is an indicator on an indicator.

Step 2: create a very short 3-period RSI and then a simple 3-period moving average of the 3-period RSI to smooth it slightly.

Step 3: add Steps 1 and 2 together to create the Composite Index.

Step 4: Create two simple moving averages of the Composite Index using the periods 13 and 33.