DEFINITION of 'Coppock Curve'
The Coppock Curve is a long-term price momentum indicator used primarily to recognize major bottoms in the stock market. It is calculated as a 10-month weighted moving average of the sum of the 14-month rate of change and the 11-month rate of change for the index; it is also known as the "Coppock Guide." The Coppock formula was introduced in Barron's in 1962 by Edwin Sedgwick Coppock.
BREAKING DOWN 'Coppock Curve'
The Coppock Curve was originally implemented as a long-term buy or sell indicator for major indices such as the S&P 500 and the Wilshire 5000. This allowed indices to spot large trends and adjust allocations accordingly. However, since the rise in popularity and trading volume of ETFs, the Coppock Curve has been adopted to analyze monthly ETF charts to help determine when major trends and adjustments are occurring. These trends can be used to predict future market growth and identify downside risk.
The curve is considered an oscillating trendline that bounces higher and lower than zero and is the summation of two rates of change: an 11-period change and a 14-period change. The curve looks at the rate-of-change calculations over an 11-month and 14-month period, and then applies a 10-month weighted moving average to derive a signal line indicator. Investors can then look at the Coppock Curve and its resulting signal line indicator to make investment decisions in the medium to long term.
Effectively Trading ETFs Using the Coppock Curve
Investors can rest easy knowing the Coppock Curve and its resulting information is already calculated by investment platforms. All an investor needs to do to accurately look at a Coppock Curve is to apply it to an existing monthly ETF chart within an investment platform and then conduct trend analysis. The Coppock Curve tells an investor to invest in an ETF or index when the indicator moves above the zero line, making the oscillating trend a positive number. For investors who already own the ETF, a positive indicator shows the ETF should be held until further notice. Conversely, when the indicator moves below the zero line, it is a signal to investors to sell existing ETF positions or wait to purchase ETFs until the indicator increases above zero.
Drawbacks to the Coppock Curve
The major drawback of the Coppock Curve is the event of a false signal. False signals occur during short, volatile periods of trading when the curve quickly bounces above and below the zero line. This may cause traders to purchase an ETF and then sell it almost immediately. Another drawback is curve fitting, a cognitive human bias. The Coppock Curve is somewhat arbitrary in its default settings, and many traders adjust those settings to change the shape of the curve and erroneously confirm their assumptions.