Confluences
Dip Index Confluences
While DIPX provides valuable insight into market breadth and internal momentum, it should not be used in isolation.
To improve signal accuracy and reduce false triggers, combine DIPX with macro trend filters, momentum oscillators, volume-based tools, and structural price indicators.
Below are the most effective combinations:
1. Macro Trend Filters: M2, VIX, Yield Curves
Use top-down macro indicators to establish the prevailing market regime — this determines how you interpret DIPX signals.
M2 Money Supply (YoY)
Measures liquidity conditions
In rising M2 environments (expanding liquidity), bullish DIPX signals carry more weight. Falling M2 favors risk-off interpretation of bearish signals.
VIX (Volatility Index)
Gauges fear/greed
If VIX is above 25, treat bullish DIPX signals as potential bottoms (capitulation). If VIX is below 15, bearish signals may indicate complacency ahead of a pullback.
10Y–2Y Yield Curve
Economic health proxy
Upward-sloping curve supports bullish DIPX signals. Inverted curve increases weight on bearish signals — warns of structural weakness.
Example: A bullish triangle appears on SPX DIPX, but the yield curve is deeply inverted and M2 is contracting → treat as a technical bounce, not a structural bottom.
2. Momentum Confirmation: RSI, MACD
These tools confirm whether price momentum aligns with breadth signals.
RSI (14-period)
Short-term momentum
Use RSI to confirm overbought/oversold conditions. A bullish DIPX signal + RSI < 30 = stronger buy case. A bearish DIPX signal + RSI > 70 = higher conviction.
MACD (12,26,9)
Trend momentum
Look for bullish MACD crossovers to confirm bullish DIPX exits. Bearish divergences on MACD + overbought DIPX = strong warning sign.
Pro Tip: Enable RSI filtering in your strategy — only act on DIPX signals when RSI is also exiting extreme zones in the same direction.
3. Volume & Value-Based Tools: VWAP
These reflect participation quality and institutional flow.
VWAP
Institutional reference point
In investment analysis:
Bullish DIPX signal + price > VWAP (1Year or 1Decade) = stronger confirmation
Bearish DIPX signal + price < VWAP = increased downside risk
4. Enhanced Volume & Sentiment: Money Flow Index (MFI)
MFI (Money Flow Index)
Measures volume-weighted buying and selling pressure, often called “volume-weighted RSI.”
A bullish DIPX signal coinciding with MFI < 20 (oversold) increases confidence in a breadth-driven reversal.
Conversely, bearish DIPX + MFI > 80 (overbought) suggests exhaustion at the highs, reinforcing downside risk.
Divergences matter: if DIPX turns up but MFI remains flat or declines, it may indicate weak participation despite improving breadth.
5. Risk-Adjusted Performance: Sharpe Ratio
Sharpe Ratio
Evaluates return per unit of risk (volatility), useful for strategic positioning rather than tactical timing.
Not a real-time signal generator, but valuable in filtering which assets to apply DIPX analysis to.
Prefer acting on bullish DIPX signals in assets with a 1-year Sharpe Ratio > 0.7—indicating consistent risk-adjusted performance.
Avoid aggressive responses to DIPX signals in assets with negative or near-zero Sharpe Ratios over medium-term horizons.
6. On-Chain Valuation (Crypto-Focused): MVRV Ratio
MVRV Ratio
Compares Market Value to Realized Value to assess whether an asset is historically overvalued or undervalued.
MVRV < 1.0 → asset likely undervalued; a bullish DIPX signal here gains higher conviction.
MVRV > 2.5 → overvalued zone; even strong DIPX readings may reflect late-cycle momentum, not sustainable strength.
Example: Bitcoin DIPX rising above 20% while MVRV < 1.2 → high-probability macro bottom setup.
7. Sentiment & Positioning Indicators
These help identify overcrowding or contrarian opportunities:
COT Report (Commitment of Traders)
Futures positioning
If DIPX turns bullish but large speculators are extremely long (in commodities/crypto), question sustainability.
Put/Call Ratio
Retail sentiment
High put/call + bullish DIPX = fear-driven capitulation, potential reversal zone.
8. Alternative Macro Indicators (Advanced)
For global or multi-asset traders, integrate broader macro tools:
World Equity Index (e.g., ACWI)
Global risk appetite
If ACWI DIPX is rising, local bullish signals are more reliable. If falling, treat local strength as isolated.
DXI (Dollar Index)
FX-driven pressure
Strong dollar often pressures commodities and EM assets. A bearish DIPX signal in gold or crypto + rising DXY = confluence.
Credit Spreads (e.g., HYG–TLT spread)
Risk sentiment
Widening spreads (rising risk) reduce reliability of bullish DIPX signals outside defensive sectors.
TED Spread
Liquidity stress in banking system
Widening TED (>40 bps) reduces reliability of bullish DIPX signals—financial stress may override technical improvement.
CBOE SKEW Index
Tail risk (black swan probability)
SKEW > 140: prefer defensive interpretation of DIPX. A bullish signal may be short-lived amid elevated crash risk.
Commodity Price Index (e.g., Bloomberg Commodity Index)
Inflation and growth proxy
Rising commodities + bullish DIPX in cyclical equities → confluence in economic reflation trades.
Global PMI (Manufacturing & Services)
Cyclical momentum
DIPX strength in industrial stocks aligned with PMI > 50 → confirms macro uptrend.
Practical Framework: Combining DIPX with Other Tools
1
Macro Regime (M2, Yield Curve, Inflation)
Is the environment bullish, neutral, or risk-off?
2
Risk & Volatility (VIX, SKEW, Credit Spreads)
Is systemic risk elevated?
3
Price Structure (200 MA, Donchian Channels)
Is the asset in a bull or bear trend?
4
Momentum (RSI, MACD, MFI)
Is momentum confirming the DIPX signal?
5
Volume & Flow (VWAP, OBV, COT)
Is participation institutional-grade?
6
Valuation & Efficiency (Sharpe, MVRV, CAPE)
Is the asset attractively priced relative to risk or fundamentals?
Execution Rule: Proceed only if ≥3 of 6 conditions align with the DIPX signal. For higher conviction, require alignment in at least two macro layers (Step 1–2) and one flow/valuation layer (Step 5–6).
Example: Bitcoin (BTC) Tactical Setup
DIPX (BTC): Rises from 15% to 30% → breadth improving
MVRV: 0.95 → below fair value
MFI (14-day): Exits 20 from below → volume-backed momentum
Sharpe Ratio (1Y): 0.82 → strong risk-adjusted return
DXY: Flat, no strong USD headwind
COT: Large speculators are net-neutral → no overcrowding
→ Signal Validated: High-conviction long setup based on breadth, valuation, momentum, and positioning.
While DIPX excels at measuring internal strength across an index, its predictive power multiplies when embedded in a multi-dimensional analytic stack. Tools like MFI, MVRV, and Sharpe Ratio are not substitutes but context enhancers, particularly across different asset regimes.
The key is layered confirmation: no single tool overrides DIPX, but consistent alignment across categories increases signal robustness and reduces exposure to false breaks—whether in equities, commodities, or digital assets.
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