[email protected] and [email protected] yield the same background colour. Isn't the point of this to detect accidental transpositions? You may want to use a simple hash in your algorithm.

The input field may need some explanatory text to alleviate the user's astonishment as to why the field is cycling colours in the first place -- it's a very unusual UI quirk.

Also, I suspect your colour palette is not friendly to the colour blind.

Edit: This is reminiscent of Lotus Notes' password hieroglyphics and Chroma-Hash: http://foxxtrot.github.com/Chroma-Hash/. The latter has been discussed on HN several times.

This is a project that I was thinking about as a way to overcome the need to have the annoying retype email address box found on sites.