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The Coppock Breadth Indicator, originally known as Trendex's Timing Technique for Texas Traders, is a little known indicator used to identify buy signals from around the bottom of a bear market. It is very good at discriminating between bear market rallies and true bottoms in the stock market and has proven to be remarkably resistant to "whipsaws". It was first published in Barron's Magazine in October 15, 1962. Since then, the Coppock momentum oscillator has been adopted and adapted by savvy market technicians around the world.

To this day, it represents a widely watched (among those in the know only) and extremely effective means of allowing market participation with significantly reduced risk. It has worked 19 out of 22 times (87% success rate) since 1920 on the US stock market indexes. In the post-war era, it has achieved a even more remarkable 94% accuracy. The Market Technicians Association in the United States gave Edwin Coppock its annual award for a lifetime of achievement in technical analysis in 1989.

PowerStocks Research have introduced another first in South Africa, namely a 32 year backtest of the Coppock Indicator on the JSE and the maintenance and publication of the first live JSE Coppock Index which we will publish on a weekly basis in Weekly JSE Pulse for our subscribers. The indicator is so reliable, and leads to such good returns, that we have incorporated it into our SUPERModel Composite Market Timing Signal with two votes.

The Coppock/Trendex Indicator was first developed in 1945 when the Episcopal Church authorities asked Edwin Sedgewick Coppock, the founder of Trendex Research in San Antonio, for a low-risk, long-term signal for use on the Dow.

Coppock believed that, in the markets, collective emotion outweighed collective reason and investors panic-sold to avoid losses. He asked the bishops how long it took to recover from bereavement or similar trauma. They said between 11 and 14 months, so he developed an indicator that would judge the momentum of the markets based on a moving average of their  11 and 14-month rates of change.

By adding up the percentage changes, relative to those intervals, a picture emerges of when those who had their fingers burned might be brave enough to dip them back in again. It is excellent when used for predicting upturns, but is less successful (bit still quite good) at predicting downturns. PowerStocks Labs have developed quantitative methods through calibration of the Trendex curve for the JSE to ensure we can use it as an excellent predictor of major stock market peaks.

The indicator was originally designed for use on a monthly time scale. It is effectively an oscillator calculated from the sum of a 14 month rate of change and 11-month rate of change, smoothed by a 10-period weighted moving average:

 Coppock = WMA[10] \; of \; (ROC[14] + ROC[11])

A buy signal is generated when the indicator is below zero and turns upwards from a trough. No sell signals are generated (that not being its design), but turns at the top have their uses in signalling danger. The indicator is trend-following, and based on averages, so by its nature it doesn't pick a absolute market bottom like our TroughFinder product, but rather shows when a rally has become established.

The Coppock Curve and the S&P500 are shown below for the last 85 years, so you can see just how remarkably accurate it is at depicting bear market turning points and hence buying opportunities. Click on the image for a larger view.

Although designed for monthly use, we have selected a well known adaptation and converted it to a daily calculation by converting the periods to 294 day and 231 day rate of changes, and a 210 day weighted moving average. This provides more timely signals without detracting from the original theory.

There are two commonly accepted ways of determining buy and sell signals from a Coppock Curve. 

The first is to trade on reversals from extremes. When the indicator was published in Barron’s (1962), it was intended to generate buy signals in the S&P 500 only, and the suggested signal was an upturn in the Coppock Curve from an extreme low.
The second interpretation involves divergence analysis. The initial thrust off of a low in the stock market is often accompanied by the highest Coppock Curve reading (peak momentum). Subsequent advances tend to be accompanied by diminishing momentum (lower peaks on the Coppock Curve). That combination of a higher peak in price accompanied by a lower peak in the Coppock Curve creates a bearish divergence. Those signals warn of a weakening, ageing advance, but often precede the ultimate top.

Caution must be exercised when viewing these sell signals because they do not always indicate the commencement of a bear market. Sell signals do indicate a downward movement in the particular index, but this may well be a mere dip in a continuing bull market.

The Coppock Curve works best in normal markets when recoveries from crashes are steep spikes and market peaks are more rounded (that is why its BUY trigger is more reliable than its SELL trigger). However, some markets (such as some commodities markets) work the reverse, namely peaks are steep spikes versus bottom recoveries that are more rounded. In these instances the Coppock indicator will give excellent SELL signals and weaker BUY signals. Since the JSE is heavily commodity weighted the Trendex curve is well suited for local use. At PowerStocks Research we will be launching Trendex curves for various indices in addition to the ALSH. 

To see the Trendex curve in action on the JSE ALSH for the last 31 years, as well as how we derive a strategy using it for BUY/SELL signals, select the backtest link in the menu below. If you are a subscriber to our website and would like to get access to the latest weekly Trendex reading, then select "See this weeks JSE Trendex reading" to be redirected to our PITBULL weekly readings page.

GO TRENDEX --> | 31 Year Performance Backtest | See this weeks JSE Trendex reading |
                         | The Combined Trendex/Repo Rate Model |
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