There are two commonly accepted ways of determining buy and sell signals from a Coppock
Curve.
The first is to trade on reversals from extremes.
When the indicator was published in Barron’s (1962), it was intended to
generate buy signals in the S&P 500 only, and the suggested signal was an upturn in
the Coppock Curve from an extreme low.
The second interpretation involves divergence analysis.
The initial thrust off of a low in the stock market is often accompanied by the highest
Coppock Curve reading (peak momentum). Subsequent advances tend to be accompanied by
diminishing momentum (lower peaks on the Coppock Curve). That combination of a higher peak
in price accompanied by a lower peak in the Coppock Curve creates a bearish divergence.
Those signals warn of a weakening, aging advance, but often precede the ultimate top.
Coppock Curves and Sentiment in Different Markets
Stock markets
E.S. Coppock designed the indicator to identify significant lows in the stock market.
The Coppock Curve is very good at discriminating between bear market rallies and true
bottoms in the stock market. Stock markets tend to make spike bottoms and rounding tops.
That is a result of the fact that fear is a stronger emotion than greed. At the end of a
bear market in stocks, investors fear losing their money. As prices fall, they fear
further losses, and sell stocks, accelerating the decline, and creating the spike bottom.
Stock market tops tend to be much more gradual affairs. As stocks get more overvalued,
companies are only too happy to satisfy demand by issuing more paper. The supply of stocks
gradually overwhelms demand.
Commodity markets
Commodity markets tend to have the opposite behavior, with spike tops and rounding
bottoms. Consequently, the Coppock Curve is better at identifying tops in commodities than
bottoms. In commodity markets, the fear is that of commodity buyers (who typically produce
added-value products from the commodity). Those buyers fear that they won’t be able
to obtain sufficient supplies — a
shortage. A cereal manufacturer would much rather pay more for corn than not have enough
corn to make corn flakes. An oil refiner marks up the cost of crude when selling gasoline.
The refiner would rather pay more for crude and charge more for gasoline than shut down
the refinery.
Currency markets
Currencies tend to fall in the middle, since they’re symmetrical markets. Buyers
and sellers are the same groups, they just have different nationalities. Consequently,
reversals tend to be sharp, but the parabolic blow-offs of commodities and waterfall
declines of stocks are not typical of currency markets. The Coppock Curve can be an
excellent indicator for currencies, signaling both buys and sells. Because currency
markets don't often reach the one-sided, emotional extremes of stock and commodity
markets, reversals in currency markets signaled by the Coppock Curve may not be as
enduring as those in other markets.
Back to Volume 16 Coppock Curves