Ask Colin

Am I right in saying that the Coppock indicator is a form of body language for the markets? Not always right, but it does give you a good hint?

The way you have put it is interesting. The Coppock indicator is a long term momentum oscillator. In general terms, when the market rises, it will rise and when the market falls it will fall. The slope of the line is a reflection of the speed with which the market rises and falls. Before a market changes direction, it will usually show a slowing in its momentum, so the indicator will flatten out and then turn. A "crash" or a panic sell off followed by a very fast recovery may be the only exceptions.

The Coppock tends to be asymmetrical in that it gives better buy signals than sell signals. Coppock seemed to be saying that this was due to the nature of the markets. Bull markets tend to be longer and rise gradually, whereas bear markets tend to be shorter and steeper. So, the indicator will tend to fall steadily and then rise, but with many twists and turns. This is why it seems to be good for the buying decision, but not so good for selling.

This is brought out in recent experience. We had a longer than usual bear market in the US and Japan. Their Coppock indicators gave several inappropriate signals well before the bottom. In Australia, where the bear market was different, the indicator was a better instrument, but we may have just been lucky. The Australian bear market was unusual in that it fell sharply, and without giving a Coppock signal, rallied back to all-time highs. Then it fell again and this time did give a buy signal on the Coppock. That has been followed by a rise to new all-time highs.

The Coppock indicator has a very good record of indicating when we are somewhere near the bottom of bear markets. It will rarely pick the exact month. Sometimes it will be early and sometimes it will be late. Also, from time to time it will give an inappropriate signal. That is the nature of the indicator, which is essentially a long term momentum oscillator. It should be used only as one element in the decision process. Coppock only claimed for it that it signaled a time to look for stocks to accumulate for long term investment. The important proviso he made was to look to buy stocks making new highs. If there were none around, the signal may well be early or inappropriate.

Using the downturns in a momentum oscillator in an uptrend as a sell signal is not a good strategy for an investor. It can be useful for traders to take profits. Coppock did not advocate its use as a sell signal. I don't use it that way either. I find that analysis of the market trend is more rewarding combined with firm action on failure of the trend on each individual stock.

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