Liquidity Adaptive Divergence Bands

This indicator measures the divergence between Bitcoin returns and Global Liquidity returns using z-scores, with adaptive bands to identify extreme overbought and oversold conditions in the relationship.

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Understanding Liquidity Adaptive Divergence Bands

What are Liquidity Adaptive Divergence Bands?

The Liquidity Adaptive Divergence Bands measure the statistical divergence between Bitcoin price movements and global liquidity changes. By calculating the z-score difference between BTC returns and Global Liquidity returns, this indicator identifies when Bitcoin is moving significantly out of sync with underlying liquidity conditions.

How It Works

The indicator follows these calculation steps:

  • Log Returns: Calculate logarithmic returns for both BTC and Global Liquidity
  • Rolling Statistics: Compute 26-week rolling mean and standard deviation for each series
  • Z-Scores: Normalize returns using (return - mean) / std deviation
  • Divergence: Calculate the difference between BTC z-score and Global Liquidity z-score
  • Adaptive Bands: Create 52-week rolling bands at ±1 and ±2 standard deviations

Interpreting the Chart

The visualization includes three subplots:

  • Top Chart (BTC Price): Shows Bitcoin price with colored fills indicating divergence zones. Red fills indicate overbought conditions (divergence ≥ 2.97), while green fills indicate oversold conditions (divergence ≤ -3.0).
  • Middle Chart (Adaptive Bands): Displays the divergence value relative to adaptive bands at ±1SD and ±2SD, with the rolling mean shown as a dotted line.
  • Bottom Chart (Threshold Levels): Shows the divergence with fixed threshold lines at +2.97 (overbought) and -3.0 (oversold) for clear signal identification.

Signal Interpretation

Overbought Signal (Score = 1): When divergence exceeds +2.97, Bitcoin is moving significantly higher relative to global liquidity conditions. This suggests potential overextension and may indicate elevated risk or the need for a correction.

Oversold Signal (Score = -1): When divergence falls below -3.0, Bitcoin is significantly underperforming relative to liquidity expansion. This may represent an accumulation opportunity as Bitcoin could be poised to catch up to improving liquidity conditions.

Neutral (Score = 0): When divergence is between the thresholds, Bitcoin is moving in relative harmony with global liquidity trends, suggesting normal market dynamics.

Key Features

  • Adaptive Bands: Unlike fixed thresholds, the bands adjust to changing market volatility
  • Statistical Normalization: Z-scores account for different scales between BTC and liquidity
  • Multi-Timeframe View: Combines short-term signals (26-week) with longer-term bands (52-week)
  • Visual Clarity: Color-coded zones on the price chart make signals immediately actionable

Trading Applications

Use this indicator to:

  • Identify when Bitcoin is overextended relative to fundamental liquidity support
  • Spot potential accumulation zones when Bitcoin lags liquidity expansion
  • Understand market regime changes in the BTC-liquidity relationship
  • Complement other technical and on-chain indicators for confirmation
  • Time macro allocation decisions based on divergence extremes