Traders often ask me “What’s your favorite oscillator?â€, 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 “curveâ€, 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 tableâ€, 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.â€
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.