I read through your description and I couldn't make heads or tails out of it. In order to backtest an idea, the idea has to be concretely, clearly, and fully described and defined. The "clearly" part is the problem for me.
For starters, what are the stoch settings? Also what is "forming" divergence, from a programmer's point of view?
I don't understand the comments that divergence is useless. Alex Elder considers it the most powerful signal in technical analysis. Divergence between an oscillator and price is not a signal per se. Rather it is a condition. It is showing a loss of momentum even though price has nominally shown more (or less) strength. Typically, this loss of momentum presages a trend reversal, but not always. Sometimes you can get two or three divergences before price responds. The key to using divergences is to require some kind of price generated signal to enter the trade. Trend line breaks are good. The divergence is the set-up, the trend line break is the entry trigger. As I recall, TradeStation has a divergence function , but I don't think I could ever get it to work properly in backtesting. I am not a big fan of using simple observation to validate systems or methodologies, but in this case I think that approach may be preferable to backtesting. At the very least, a divergence signal is an important warning that the trend is nearing exhaustion. Ignore it at your peril.
I agree that divergences can be very useful, and would suggest to those who have given up on them to try again The way I use them is to time or confirm entries in markets that are trending, but not too strongly. The technique of using double, simultaneous divergence of the Stochastics and MACD (e.g., a la Alex Elder, TradersInternational, and others) is particularly powerful - but has to be implemented and used properly.
I use modified stoch. with 8-5-8 settings and or CCI 12 period. On S&P chart I pick significant intraday top or bottom and start to count points. Then if price moves 10 points I will look for a pull back and divergence in Stoch. or CCI( It might be easier to program one then other so use one which is easier ) to enter. Example of this setup is on yesterday 5 min charts of SPZ between 9:50-13:10et. I apprecciate any comment , feel free to ask for an explanation if I was not clear enough. Walter