Disparity Index: Formula, How to Read It, Settings and a Real S&P 500 Example

The disparity index measures how far the close is from a moving average, in percent of that average. A reading of +3 means the close is 3% above its 14-bar average, −3 that it is 3% below. LuxAlgo traces the calculation to Japanese technical analysis, where it is known as the kairi, or separation, index, and credits Steve Nison with popularizing it in the West in his book Beyond Candlesticks.

How the disparity index is calculated

Subtract the moving average from the close, divide by the moving average and multiply by 100. LuxAlgo notes that platforms use either a simple or an exponential average and that the simple version is identical to the Kairi Relative Index. Thinkorswim’s DisparityIndex study, for instance, uses an exponential average. Our chart uses a 14-bar simple average.

How to read the disparity index

Above zero, the close is above its average; below zero, under it. The size of the reading is the size of the stretch. LuxAlgo stresses that the index is unbounded and has no universal overbought or oversold level: a stretch that is extreme for a major currency pair is routine for a small-cap stock or a cryptocurrency. Thresholds can only come from the history of the market itself, and even then, as the figures below show, an extreme stretch says little about what comes next.

The disparity index on a real chart

The full chart below the introduction shows the 14-bar disparity index on the daily S&P 500 ETF from October 30, 2025 to October 28, 2026, with dividend-adjusted prices. The index starts at +1.1 and was above zero on 59.2% of the days. To judge extremes, we use the 5th and 95th percentiles of the same indicator on the S&P 500 index since 1970: −3.17 and +3.10.

The ETF went below −3.17 on two days only, March 27 and 30, 2026, with a low reading of −3.73 at a close of 630.89. Twenty trading days later, on April 27, it closed at 711.57, 12.8% higher. Readings above +3.10 ran from April 8 to April 22, except on April 21 at +3.00, with a high of +5.33 on April 17 at 706.56; twenty trading days later the ETF was at 735.44, still 4.1% higher. The only other reading above +3.10 came on August 4, at 769.42; twenty days later the ETF was 1.2% lower. In this window, one oversold stretch was followed by a rally, one overbought stretch by further gains and one by a small decline.

Best disparity index settings

LuxAlgo reports that lookbacks of 13 and 14 bars are the most common. Longer averages give wider readings: on the S&P 500 index since 1970, the 5th and 95th percentiles were −3.17 and +3.10 with 14 bars, −10.35 and +14.66 with 200 bars. The extremes of the whole history show the same: −26.85 with 14 bars on October 19, 1987, and −39.65 with 200 bars on November 20, 2008. Thresholds must be set for each length and each market.

Does it work?

Our bench tests chart patterns detected by rule against random entries, not indicators (see our methodology). We measured the 14-bar index on the daily S&P 500 from January 1970 to October 2026, without dividends or costs. All days together were followed by a 20-day change of +0.73% on average, positive 61.4% of the time. On the 716 days at or below the 5th percentile, the next 20 days averaged +1.27% and were positive 58.5% of the time, with a much wider spread of outcomes: a standard deviation of 7.44%, against 4.44% for all days. On the 716 days at or above the 95th percentile, they averaged +1.19% and were positive 65.1% of the time.

Stretches above the average were followed by further gains, not by pullbacks. Stretches below it were followed by larger average gains, but less often and with far more dispersion, so they did not mark reliable bottoms either. Two cautions. The percentiles are taken over the whole history, which a trader in 1970 could not have known. And the 716 days come in clusters: stretched readings last several days in a row, and their 20-day windows overlap, so they hold far fewer independent episodes than 716, and a gap of 65.1% against 61.4% is weak evidence.

The disparity index is the moving average gap in percent: see our moving average guide. Related oscillators are the percentage price oscillator, which measures the gap between two averages, and the rate of change. All are listed on our page of momentum indicators.