When the LED is alternating between two colors (or more on other phones) it's probably two (or more) notifications and you've got the settings to loop through them all. Standard setting is to do this when you have the charger plugged in IIRC.
The LED is working with the screen on for me and I think it always has on the M8. On my Nexus 4 it turns off when I turn on the screen and the LED turns on again if I don't clear it and turn off the screen. Great if you don't want to read the message right now and still don't want to miss it later. Since the LED is always working wether or not the screen is on, this is not a problem on the M8.
But if it's possible to alternate with both colors on the same notification, that would be a great way to get a third "color". Could you check if it is like I said or if it really is dual color?
EDIT:
I got it to work! In mixer you can set one color to solid and one to flash to get both. So there are actually a difference on green + amber and amber + green. This will give us a total of 6 options: green, flashing green, orange, flashing orange, orange + flashing green, green + flashing orange.
EDIT2:
The non-flashing color isn't very strong, so I'm not sure how useful this really is.
http://youtu.be/CIRPbcZqV0U