Over the years, analysts have been searching for the holy grail of stock market investing. They feel that if they can find the solution as to when to buy and sell, there will be a guaranteed ability to make money with their investment strategy. This is not entirely wrong. The stock market has shown to move in trends over the years. The emergence of the internet and the ability to track almost real time data has enhanced the analysis of trends. As the famous saying goes, “Don’t bet against the trend”.

One of these trends that have been discovered is known as the Coppock curve. This curve was first published in 1962 in Barrons by Edwin Coppock. It is a technical analytic calculation that will supposedly determine when the market is bullish and when it is bearish. It is set to recognize major bottoms and tops within the stock market. The stock market typically has rounding tops and sharp bottoms, so the Coppock curve may be a viable calculation for the astute investor.

The math goes like this:

1. calculate the percentage gained or lost by the Dow for the past 11 months.
2. calculate the percentage gained or lost by the Dow for the past 14 months.
3. calculate the average of these two figures.
4. calculate a 10 month weighted average by multiplying this months average by 10, last months by 9, the previous month by 8, etc. and summing them. Then divide the sum by 55.

The value obtained in the above calculation is the Coppock value for this month. You can then plot the results on a graph to obtain the Coppock curve. The way the curve works is as follows:

When the curve line is below the zero point (in the negative) and then moves upward, it is a buy signal. If the curve line is above the zero point (in the positive) and makes a move downward, then it is a sell indicator. The chart below indicates how this works based on historical data. The upper panel is the Dow Jones index over the past years. The lower panel is the Coppock curve line. You can see the buy points highlighted in green and the sell points highlighted in pink.

Chart 1: DJIA and its Coppock signals

The Coppock curve is based on a monthly signal. Therefore you need to wait an entire month before you can obtain a reading. This delay may be a problem in a volatile market. I have not tested it, but I wonder if a two week reading would give a more timely reading. It has probably been tested before but bears (no pun intended) looking at. I also wonder what the reading would be for the S&P 500 instead of the Dow Jones index.
Another point is to watch for false signals. This may be possible Comparing the Coppock curve to other momentum indicators and other trending analysis may be helpful to obtain a confirming answer to the buy/sell question.
In one analysis of the Coppock curve indicator as compared to the buy and hold strategy, it was determined that except for the past couple of years, the Coppock curve beat the buy and hold strategy. This has not been the case since 2007 due to the volatile market conditions. Both strategies have basically been moving together during this time period.
The Coppock curve is one more step in the search for the Holy Grail of what the stock market may do. It is certainly a trending line that bears looking into and doing additional analysis on.
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Tags: Coppock curve indicator, Coppuck curve, Edwin Coppock, make money, Stock Market, technical analysis, trending analysis