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The Coppock indicator signals the beginning of a bull market. It is based on the rates of change of the market, so it illustrates trends in market movement. Investors use the indicator to identify favorable conditions for long-term investment.
A bull market is an optimistic market, while a bear market is the opposite. In a bull market, prices increase faster than they have on average throughout the history of the market. By definition, bull and bear markets last for a significant time period: temporary swings in the rate of change of prices do not constitute changes in the bull or bear status of the market. If investors can identify the commencement of a bull market, they can make long-term investments in anticipation of the future increase in prices. The Coppock indicator alerts investors to these changes.
To calculate the Coppock indicator, add the 11-month and 14-month rates of change together for some market index. Then take a 10-month weighted moving average of this sum. The indicator should oscillate between negative and positive values. When the indicator turns upward at a position beneath the zero line, a bull market is beginning.
Market analysts who rely on the Coppock indicator track it continuously, waiting to observe its turns. Sometimes, rallying prices in bear markets seem like a change in market conditions but prove to be temporary. The indicator is useful because it differentiates between these flukes and actual bull markets. Long-term investors can thus anticipate steady increases in the market.
Edwin Sedgwick Coppock devised the indicator in 1962. He originally calculated it using data from the Dow Jones industrial average, but any index will yield a reliable indicator. It tracks the psychology of the investors in a market. The upturn occurs when investors regain optimism as a group after the ravages of a bear market. This can happen at any level from the zero line to deep in the negative numbers, and there is no way to predict the turn of the indicator.
Historically, the Coppock indicator has been a fairly reliable signal of a bull market. There have been a few false signals, but generally an upward turn in the indicator is followed by a steady increase into the positive region of the graph. It usually lags behind the actual commencement of the bull market; this delay gives it reliability, however, because the indicator does not start to increase until the bull market has exhibited signs of persistence.