Coppock or popycoppock?
Posted on January 23, 2009 by Richard Beddard
Filed Under Investing, Markets |
Picking the market’s bottom
A letter to Money Observer sent me on a curious trail into the world of technical analysis yesterday.
A reader asked whether the Coppock indicator is signalling investors should buy the FTSE 100.
Early in my investing career, I used charts to time my purchases. It’s very easy to do, with software and on websites like the Interactive Investor mothership (here’s a Java chart of the FTSE 100. Click on ‘settings’ to see all the options).
Sadly, I didn’t have much confidence in the decisions I made and I soon gave it up.
I plotted Coppock for our reader, though, and discovered it’s not signalling a buy, so I asked David Linton of Updata, a company that makes technical analysis software for a second opinion.
He explained:
The indicator is renowned for long-term buy signals but is not for sell signals. A Buy Signal is given when the line starts to turn upwards when the value is already below zero. On this basis we have only seen one buy signal in the last ten years in mid 2003 and we have not seen another buy signal yet as the chart shows. You should wait for this line to turn and start rising.
Look how soon after the bottom of the market in 2003, Coppock called the market correctly (the FTSE 100 is the top line, Coppock is the bottom line):
FTSE 100/Coppock
The mothership’s glossary says Coppock has served investors well before:
In recent times, the Coppock indicator signalled rallies in 1988 and 1994 and investors who acted on the indicator made a lot of money.
So, maybe it really works… Why? Back to David:
The Coppock Oscillator is one of the oldest technical indicators. It adds together the 14 and 11 month percentage changes of the price and then takes a 10 month weighted total of this figure to create the oscillator.
The significance of 11 and 14 months? Back to the glossary for my favourite bit. Coppock is named after an economist, Edwin Coppock. The American Episcopalian Church asked him to identify cheap buying opportunities for long-term investors:
Coppock thought setbacks in the stock market were like bereavements and required a period of mourning before normal spirits revived. So he asked the bishops how long it took people to get over the death of a loved one. The answer was between 11 and 14 months.
Well, September last year felt a bit like bereavement. So, expect the gloom to lift next summer. Either that, or watch Coppock. 
Footnotes:
- From his definition of technical analysis, I’d say Graeme Pietersz of the moneyterms website is also a sceptic.
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