What Is the Coppock Curve?
The Coppock Curve is a long-term price momentum indicator used primarily to recognize major downturns and upturns in a stock market index. 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 Coppock.
- The Coppock Curve is a technical indicator that provides long-term buy and sell signals for major stock indexes and related ETFs based on shifts in momentum.
- The indicator is designed for use on a monthly candlestick chart, where each candle is one month.
- A reading above zero on the indicator signals a buy, while a drop below zero is a sell signal.
How to Calculate the Coppock Curve
The Coppock Curve can be calculated as follows:
Coppock Curve = WMA10 of (ROC14 + ROC11)
- WMA10 = 10-period weighted moving average
- ROC14 = 14-period rate of change
- ROC11 = 11-period rate of change
Given this formula, proceed through the following steps:
- Calculate ROC14 using the most recent monthly closing price relative to 14 periods (months) ago.
- Calculate ROC11 using the most recent monthly closing price relative to 11 periods (months) ago.
- Add ROC14 to ROC11. Continue to do this each period going forward.
- Once there are at least 10-periods of ROC14 added to ROC11, take a weighted moving average of the last 10 values. Continue to do this each period going forward.
What Does the Coppock Curve Tell You?
The Coppock Curve was originally implemented as a long-term buy and sell indicator for major indices such as the S&P 500 and the Wilshire 5000. Often, it is used with long-term time series such as a candlestick chart, but where each candle contains a month's worth of price information. When the indicator is above zero it indicates a hold. When the indicator drops below zero it indicates a sell, and when the indicator moves above zero it signals a buy.
Beyond the signals above, the curve will often appear uncorrelated to price. This is due to the long-term lagging nature of the indicator.
Example of How to Use the Coppock Curve
Apply the Coppock Curve to a monthly price chart of a stock index or stock index exchange traded fund (ETF). The general strategy is to buy when the Curve rises above the zero line and consider selling when the Curve falls below zero. For investors who already own the ETF, when the Coppock curve is above zero the indicator is signaling to hold onto the investment.
The SPR S&P 500 ETF (SPY) shows all the buy and sell signals the Coppock Curve has generated since mid-1995.
The indicator kept investors out of a portion of the 2001 and 2008 stock market declines. However, in 2016, the indicator provided a sell signal near the market bottom and then gave a buy signal a short time after at a higher price.
The Difference Between the Coppock Curve and Rate of Relative Strength Index (RSI)
The relative strength index looks at how the current price compares to prior prices, though it is calculated differently than the rate of change (ROC) indicator used in the Coppock Curve calculation. Therefore, these indicators will provide different trade signals and information.
Limitations of the Coppock Curve
The major drawback of the Coppock Curve is the event of a false signal. False signals occur when the curve quickly moves above and below the zero line. This may cause traders to make purchases, but then the indicator says to sell them again, or vice versa.
Another drawback is curve fitting, a cognitive bias. The Coppock Curve is somewhat arbitrary in its default settings, and many traders adjust those settings to change the shape of the curve to better fit historical price data. Fitting the indicator to provide the best historical signals may not produce better future signals.
The indicator is also looking at 10-, 11-, and 14-month averages. The indicator will lag in flagging major market bottoms and tops.