Mike Lenhoff, chief strategist and head of research at Brewin Dolphin Securities, draws our attention to the “Coppock indicator” in one of his latest posts on the London Stock Exchange website.
As Lenhoff points out, the Coppock indicator – unlike other technical analysis tools – was designed specifically to identify strategic buy signals instead of short-term trading opportunities. And while it’s not quite indicating a buy signal just yet, it is beginning to indicate a trough, especially in the Nasdaq.
First, a little history about its origins. As Lenhoff explains:
Its history, so the story goes, lies in the United States when, in the early 1960s, the Episcopalian Church asked Edwin Coppock, a business economist, if he could come up with something that might spot long-term buying opportunities. Coppock must have thought the stress released by a major bear market was emotionally comparable to bereavement because he responded by asking the church to tell him how long, on average, a period of mourning might last. He was told between 11 and 14 months.
As to its methodology:
…the indicator is defined as a 10-month weighted moving average of the sum of the 14-month rate of change and the 11-month rate of change in the relevant index. The confirmation or buy signal comes when the indicator is a) below zero and b) turning upwards from a trough.
But does it actually work? According to Lenhoff, yes — Coppock does have a fairly decent track record, bar one small forecasting glitch back in early 2002 when it signalled the end of the dot com bust a touch too early. Accordingly it is worth consideration.
And as can be seen from the following charts, when applied to the FTSE, the S&P and the Nasdaq it does seem to be indicating a slowdown in descent at the very least (the bold line indicates the Coppock trend line):
And a small upturn emerging in the Nasdaq?
Although, as Lenhoff cautions (our emphasis):
However tempting it may be to anticipate the more decisive upward move from the trough, it’s wise to wait for this to happen before shouting ‘yippee – bear market’s over’.