V.11:3 (125-126): The Coppock Guide by Tim Hayes

The Coppock Guide by Tim Hayes

One of the best megaphones of market action is the Coppock guide, a long-term price momentum indicator that effectively filters out short-term and intermediate-term market swings to issue a clear message on the market's underlying long-term trend. Tim Hayes of Ned Davis Research reports on the success of this indicator.

The Coppock guide, which was developed in the early 1960s by technician E.S.C. Coppock, was designed as a guide by which to identify major market bottoms, with the specification that buy signals would be generated when the 10-month smoothing dropped below zero and then reversed upward. Even though Coppock developed the index and buy rule well before the arrival of computerized indicator analysis, the optimal buy rule determined after number crunching by our computers is not far off from Coppock's original rule; the most profitable long positions since July 1957 would have been generated by buying whenever the index dropped below 1.3 and then reversed upward.

The Coppock guide is calculated by first determining the 14-month rate of price change of the Dow Jones Industrial Average's (DJIA) monthly close, then adding that rate to the closing's 11-month rate of price change, and finally smoothing the result with a 10-month front-weighted moving average.

The Coppock guide is also an effective indicator of market tops, with sell signals flashed when the index rises above 1.3, tops out and then drops by l l points. In fact, as shown in Figure 1 in the upper lefthand corner, an investor following the indicator's signals would have profited in 90% of the cases, earning 9.2% compounded annually, 70.4% better than the comparable per annum return of 5.4% produced through a buy-and-hold approach over the same timeframe. Using this single indicator, an investor's $10,000 investment on July 31, 1957, would have grown to $223,152 by December 31, 1992.