Payoff index checkpoints for open interest and divergence

A three-gate weekly drill

This article is a TradersWeek editorial reading of a historical payoff-index workflow. The archive describes how a recursively smoothed dollar-volume series was inspected for money-flow direction, open-interest support, and price-indicator divergence. The three-gate weekly drill is an editorial arrangement of that workflow, not a procedure attributed to the archive.

Gate one reads the payoff index as an on-balance volume analog: daily dollar-volume change is treated as money moving into or out of a contract. Gate two applies open-interest analysis as a filter, asking whether the size and sign of the open-interest change support the mean-price move. Gate three accepts a hypothesis only after a documented divergence is confirmed by a zero-line, average, or trend break.

What the payoff index combines

The payoff index is a recursively smoothed measure of daily dollar-volume change. It combines mean price, volume, a one-cent move value, and the absolute open-interest change scaled by the larger of the two compared open-interest readings.

Mean price is the average of a bar high and low. That same mean-price comparison sets the sign of the open-interest term. The term is positive when today's mean price is above yesterday's mean and negative when the mean price is lower.

Gate one: on-balance money flow

On-balance volume, in this archive reading, is a signed volume-accumulation idea. The payoff index plays that role for dollar-volume change. Zero-line polarity says whether money is entering or leaving. The change in the series says whether that flow is strengthening or fading.

The index was expected to be examined in rising, falling, and sideways regimes. A weekly Treasury-bond series from late 1981 through mid-1984 was used as an up-and-down market illustration.

Gate two: open-interest confirmation

In the archive construction, the open-interest term already sits inside the payoff index. Absolute open-interest change is scaled by the larger of the two compared readings and then signed by the mean-price direction. Editorial reading: keep that term visible as its own filter, so a money-flow move is not accepted until open interest shows that capital is funding it.

On weekly sugar, volume and open-interest action were treated as especially material. That is the closest archive cue for not collapsing the filter into the price plot.

Gate three: divergence plus a break

Divergence, as used here, is a repeatable chart condition in which price makes a new high or low that the payoff series does not confirm. A leading reading looks for positive and negative divergences between price and the payoff index.

Those divergences were often checked against a break of an indicator trendline or of support and resistance, and against a 21-period weighted moving average of the index. That overlay is the weighted-average overlay. It times reclaim or loss of momentum after polarity and divergence readings.

Editorial rule for accepting a hypothesis: document the unconfirmed price extreme first, then require at least one confirmation from zero-line polarity, the weighted-average overlay, or a trend or support-resistance break. A divergence alone is a condition, not an accepted signal.

Weekly Treasury bonds

On weekly Treasury bonds, a 1983 advance that exceeded prior highs was treated as weak because the payoff index made a lower peak, showed a long-horizon negative divergence, and later lost support, its moving average, and the zero line. That sequence is the full stack: an unconfirmed high, then support loss, average loss, and a zero-line cross.

Weekly crude oil

On weekly crude oil, a slightly lower payoff-index high at a November 1985 price high, followed by an uptrend and zero-line break, was treated as a confirmed bearish divergence. Later higher index lows against lower or retested price lows were treated as bullish divergences.

Weekly and daily sugar

On weekly sugar, a later price high near a lower payoff-index peak, with the index already below a rolling-over moving average, was treated as a negative divergence. Volume and open-interest action were treated as especially material on that series.

On a daily sugar contract, a new price high that the payoff index failed to confirm, returning only to prior resistance while the moving average stayed flat, was presented as a non-confirmed top. A later break of the long-horizon uptrend in the index was treated as further deterioration.

Weekly live hogs

Weekly live-hog examples used the same stack of on-balance-style money flow, open-interest-sensitive confirmation, and divergence. The archive shows a bullish divergence plus moving-average reclaim at lows, then a later unconfirmed second price high, moving-average loss, uptrend break, and a zero-line cross held as an intermediate sell reading except for one brief whip.