The Coppock Curve

The Coppock Curve is a long term momentum oscillator which was created by economist E.S.C Coppock and first published in the October 1965 issue of Barron's. The creator intended to use it to find long term bottoms in the S&P 500. Since then, it has been used for a similar purpose for all major equity indices as well as highly liquid and widely traded stocks. Since the indicator is not very sensitive to rounding bottoms, traders prefer using it for equities (which tend to have spike/crash bottoms) as opposed to commodities (which tend to have rounding bottoms). 

Structure and Calculation

 The Coppock Curve is calculated as follows

Coppock Curve = 10-period WMA of (11-period ROC + 14-period ROC)

where WMA stands for Weighted Moving Average and ROC is the Rate of Change. So basically, the Coppock Curve is a smoothed momentum oscillator which is calculated as the 10-period WMA of the sum of the 11-period ROC and the 14-period ROC.

Since the Coppock Curve is simply a long term oscillator smoothed by a weighted moving average, it has a zero line which allows  traders to spot trend reversals. It is generally used only with long time frames (monthly and higher) and is used exclusively to spot buy signals (when the indicator goes below the zero line and comes back up again).

On the other hand, many traders do use the Coppock Curve to spot sell signals as well. A sell signal is generated when the Coppock Curve crosses above and then below the zero line. Similarly, while the Coppock Curve is supposed to be a monthly indicator, many traders do use it to spot weekly as well as daily trend reversals. Traders also experiment with different ROC and WMA time periods to reduce noise (false signals) when using the Coppock's Curve on daily and/or weekly time frames.

Illustrations

Long term (1979-2016) monthly chart of the BSE Sensex featuring the Coppock Curve.

As you can clearly see in the chart attached above, virtually every monthly buy signal given by the Coppock Curve has resulted in a subsequent 10% plus gain in the BSE Sensex. It is also apparent that the Coppock Curve only rarely gives a buy signal and it almost never gives false signals if it is used as intended. 

In conclusion, the Coppock Curve is a strictly long term indicator which when used together with other indicators can prove to be an invaluable tool for long term investors and swing traders.