Trading the Coppock Curve

The Coppock Curve is a smoothed momentum oscillator that can independently signal market turns. 

E.S.C. Coppock introduced the indicator in Barron’s in October 1965. The goal of this indicator is to identify long-term buying opportunities in the S&P 500 and Dow Jones Industrial Index. The signal is very simple. Coppock used monthly data to identify buying opportunities when the indicator moved from negative territory to positive territory. Although Coppock did not use it for sell signals, many technical analysts consider a cross from positive to negative territory as a sell signal. The Coppock Curve is a smoothed momentum oscillator and can be used on any timeframe while investors can choose based on their desired trading/investing style and time horizon. The Coppock Curve is similar to one of the most popular indicators, the moving average convergence/divergence indicator, or MACD.


Calculation

The calculation for the Coppock Curve is very simple. It is calculated as a 10-month weighted moving average on the sum of different periods as a momentum oscillator that oscillates above and below the zero line. 

After being commissioned by the Episcopal Church to find long-term investment opportunities, Coppock, a burgeoning economist, reportedly asked bishops how long it took for people to get over the death of a loved one. He theorized that market downturns were similar to bereavement periods and would require a certain amount of time to mourn. He developed a series of calculations based on the responses he received and settled on 11 and 14-month periods. Coppock theorized that the recovery period for stock market losses would be similar to this timeframe. The weighted moving average places more weight on recent data and less weight on older data by multiplying the first data point by one, the second data point by two and so forth.

Coppock Curve = 10-period weighted moving average of 14-period rate-of-change + 11-period rate-of-change

Calculations for the rate-of-change (RoC) look like this:

ROC = [(Interval Close - Interval Close N periods previous) / (Interval Close N periods previous)] x 100

For the Coppock Curve, the “N” variable used in the RoC calculation can be substituted by 11 and 14 (the interval period for the short and long RoC measurements). Two individual RoC calculations are taken. The oscillator is then plotted on a chart (see “Coppock momentum,” below). 

The weekly charts produce many more signals than the monthly chart. Likewise, an intraday chart would form more signals than the weekly or monthly charts.

Apart from choosing the timeframes, parameters can also be adjusted based on the trader’s choice. Traders can choose whether they want to go for a faster or a slower Coppock Curve indicator. A shorter RoC setting would make the Coppock Curve more sensitive and faster, which would be best for intraday traders. Meanwhile, a longer setting would make the Coppock Curve less sensitive and slower, which could be a favorable indicator for swing traders.


The CC Trading Strategy

The key aspect of the Coppock Curve is the zero line. This is the region that acts as a trigger for trading signals. A positive bias (for long positions) is seen when the Coppock Curve is moving above the zero line. The bias is negative (for sell positions) when the Coppock Curve falls back below the zero line. 

1. Bullish Centerline Crossover
A bullish centerline crossover occurs when the Coppock Curve moves above the zero line and into positive territory indicating that momentum has changed from bearish to bullish. 

2. Bearish Centerline Crossover
A bearish centerline crossover occurs when the Coppock Curve moves below the zero line and into negative territory, indicating that momentum has changed from bullish to bearish. 


Centerline Crossover 

There is a center zero line and above which there is a positive territory and below which is seen as a negative area. A buy signal is generated with a crossover into a positive territory while a sell signal is generated when it enters into a negative territory. In the monthly chart, you will not get many signals using the Coppock Curve but these limited signals are very strong either way.

“Amazing opportunities” (below) shows Amazon Inc. (AMZN) on a weekly time frame with the Coppock Curve. While some traders might think that if you missed getting long Amazon in 2014 or 2015 you were out of luck, there were several consolidation periods and corrections that would have provided a profitable entry point, and the Coppock Curve spotted these opportunities. Amazon surged several times following a bullish centerline crossover. This shows extraordinary strength.  

While trading off of crossovers is a great signal, the zero line also serves as a pivot. A failure to take out the zero line following a test of it can also signal a reversal. This occurred with Caterpillar (CAT) on a daily timeframe several times over the last year (see “Playing defense,” right). The Coppock Curve generated a profitable buy signal in CAT in April 2017 preceding a long-term uptrend. On numerous occasions in 2017, CAT retreated back to the zero line in the Coppock Curve, but did not cross it. It defended the zero line once it crossed in April. Traders were able to ride the whole move, getting back in or adding to their long position each time the zero line was successfully tested. That’s the extraordinary power of Coppock Curve.

Alternatively, the oscillator can also be used as a tool for knowing when to take profits. For example, long positions should be closed if the Coppock Curve turns negative; short positions should be closed if the Coppock Curve rises into positive territory. We can see an example of this in “CC profit-taking,” below.  The monthly Apple (AAPL) chart, shows the CC indicating several long entry points. The CC also provides profit taking signals when the CC drops back near the zero line. Traders could have taken profits before Apple hit the low of each correction.

The Coppock Curve is simply a smoothed momentum oscillator. Even though it was originally designed for monthly charts and long-term analysis, it can be used on intraday, daily or weekly charts, and the settings can be adjusted to suit one’s style. The main signals are generated with crosses above and below the zero line. More aggressive chartists can consider looking for bullish and bearish divergences to anticipate such crossovers. Be careful, though. Divergences do not always result in trend reversals because the trend can simply slow and continue in the same direction. The zero line works as a pivot, which means it can signal a trade in either direction depending on whether it is broken or holds. 

All traders can benefit from experimenting with these technical tools. When combined with additional technical analysis tools such as pattern analysis or momentum indicators, Coppock curve can become an integral part of a sound trading strategy. The Copper Curve also comes with its own shortcomings and gives relatively weak sell or short position signals as compared to the buy or long positions signal. The Coppock Curve could be used by intraday traders to identify the bullish trends. The indicator could also be traded along with other indicators for confirmation.