A Momentum Oscillator With Pizzazz

Traders often ask me “What’s your favorite oscillator?”, and I usually hedge, and hem and haw around the answer, because in general, I use very few indicators. I lean more toward the pure price action side of  charting. However, there is one oscillator that truly  caught my attention: it’s called the Coppock Indicator, and I often share it with people when they ask.

During a year when  the US landed  its first rocket on the moon, and the first Wal-Mart opened, Edwin Coppock developed his Coppock Oscillator. Designed for the S&P 500 index, this “guide” or “curve”, much to my amazement, has been faithfully identifying and signaling the start, and end, of bull market runs, and it’s been doing it for decades passed! I found that it has also been applied to similar stock indexes, like the Dow Jones Industrial Average as an example.  So what makes up this indicator that I appreciate so much?

This trend-following, averages-based oscillator is designed for use on a monthly time scale only.  Using a ten-month smoothing of the averaged eleven-month rate and fourteen-month rate of change in the S&P 500, this oscillator will reverse direction when the momentum in the stock market runs out of gas. If you wanted to diagram it, this is what it would look like

WMA [10] of (ROC [14] + ROC [11])

If you are looking for a buy signal, this is generated when the indicator is below zero, and turns up from a trough. If you want to know when it is time to take your money “off the table”, look for a double top without the curve falling to zero between the tops. This shows a very strong market that has not partaken of any normal market corrections, and  broadcasts “trouble is just around the corner.”

If you think the Coppock Indicator might not be all that it’s cracked up to be, then  just take a look at some of the statistics that I uncovered.  This “double top” has occurred six times in the past eight years, and the indicator nailed it every time:  October 1929, -86%, May 1946, -39%, February 1969, -36%, January 1973, -48%, September 1987, -33%, and April 1998, -18%.  In 2007, the curve told us that there was trouble on the horizon, and sure enough, by late 2008 the S&P was off over 47% from the highs seen during 2007.

So if you and I should ever be talking, and the word “oscillator” comes up in our discussion, be prepared for my dissertation on Mr. Coppock. He might just be worth a little additional research.