Enhanced Coppock Curve

Enhanced Coppock Curve Rick Martin ago....through nine bars ago. The factor (ROC14 t ROCll) for Introduction the most recent bar is multiplied by 10, the previous bar by 9, and Momentum indicators such as rate-of-change in price, momentum, soforth, resultingin a lo-period weightedaverage of the smoothed moving average oscillators, MACD and Co,irpock Curves all sufferfrom a ROC. similar afJ2iction: they ojen give false sell signals as to@ start to form Theseequations produce a sinusoidal-likecurve asmay be seen even though they tend to work reasonably well at bottoms. This is due to in the Chart 1 of the DJIA from 1940to the present. The original the fact that most tops take time to develop “socalled rounded tops” which use of Coppock Curves wason monthly charts and focused only show up as slowing momentum, and momentum-based indicators will on the DowJones Industrial Average and they are still usedin this often turn down well in advance of the actual top. By contrast, bottoms fashion by somemarket technicians. We have not tested other tend to be sharper and quicker to develop, so the change in momentum is smoothing factors such as using a lo/15 ROC versusCoppock’s sharper and better defined. 11/14 combination, but the Ned Davis organization has done This hasgenerally led to poor trading results if these types of indica- extensive testing and found that Coppock’s original rules were tors are used by themselves. These types of indicators are therefore typi- very close to optimal.’ tally used to measure divergences with the underlying security or in con- Chart1 junction with other indicators to arrive at trading decisions. This paper will examinethe trading prospects of using the classic DJlAWith CoppockCurve Overlaid-1940-1997 Coppock Curve as the setup for a trade in conjunction with a well-debned LoIKiMW. cappoa Ymldrmrm Ml11 break in price as the trigprfor the trade. It willfirst examine the trading T performance of the Coppock Curve itselfin its originalform and will then c add the trading enhancement. The Enhanced Co#ock Curves (ECC) approach will be tested on the Dow Jones Industrial Average (the original focus of Coppock), the Investor’s Business Daily industry sectors, and individual stocks. Results will be contrasted with buy-and-hold strate- gies. There are three primaryfindings of this study: 1. Traditional Coppock Curves perform well in choppy markets, but lead to manyfalse SELL signals in strong, trending markets. We consider i this at best to be a good-at-bottoms/risky-at-tops trading model that 1910 IBY2 IEm 1970 IS80 11990 can result in lackluster performance relative to a buy-and-hold strategy. Original Trading Signals Were Simple... 2. The Enhanced Coppock Curve techniques described in this stud?) re- The original concept employed by Coppock wasvery straight- sult in majo-rperfmance enhancements relative to the various C@ock forward: be long the market when the curve turns up from be- Curve techniques that have evolved over the gears. low the zero line and be cautious when it turns down from above 3. ECC can be effectively used to trade stocks, with performance generally the zero line. This approach has been tested on the S&P 500 well in excess of a buy-and-hold strategy about 85 %-90 % of the time. from January 1960through September1993 by Elliott Middleton’ with averageone-year total returns (including dividends) of about Coppock Curves Revisited 20% and average two-year total returns of about 32% Coppock Curves were developed during the early 1960sby A more trading-oriented approach has been promulgated for E.S.C. Coppock, the recipient of the Market Technicians many years by Gail Dudack of Warburg Dillon Read.’ She not Association’s1989 award for notable contributions to the field of only applies her approach to the major indices, but also to the technical analysis. His formulation proved to be a very useful major S&P sectorsas a tool in evaluating overall market strength technical tool during the choppy markets of the 1970s but the and predicting sector rotation. Her buy and sell signalsare sum- great bull market of the 198Os-1990shas seen references to marized below and we will use them as the basisof comparison Coppock Curves almost disappearfrom the literature. throughout this study: The goal of his work wasto develop a formulation that would BUY if (1) the change to upward momentum - a trough - occurs make the troughs formed by his indicator significant predictors below the zero line, or if (2), the change to upward momentum of market bottoms. He accomplishedthis by creating a smoothed, occurs above the zero line and the indicator has been declining weighted, percentage rate-of-changein price oscillator. His for- for at least twelve periods. mulation was asfollows (See Appendix A for the MetaStock for- SELL if the change to downward momentum - a peak - occurs mulasthat were used): above the zero line. STOP if the Coppock Curve reversesand none of the BUY or CC =(ROC14tROC11)'1Ot(ROC14.,tROCll~,)*9t....t(ROC14,tROC11,)*1 SELL criteria are met. where ROCll is an ll-period percentage rate of change in . ..But The Results Weren’t Always So Great price and ROC14 is a 14period percentage rate of change in As can be seen in Chart 1, the peaksin the Coppock Curve price. The subscriptsin the equation represent the percentage usually occur severalbars in advance of the correspondingpeaks rate of change in price calculated one bar ago, two bars MTA JOURNAL * Summer-Autumn 1999 25 in prices. The troughs in the curve, however, show very close Chart 3 alignment, typically lagging the corresponding troughs in prices ..While Others Don’t by only one or two bars. When applying Dudack’s rules to the monthly closing prices of the DJIA from January 1941 through December 1997, the overall performance is lackluster. A buy-and-hold strategy did substantially better as seen in Table 1 (the results do not include dividends or commissions, therefore the actual results - particu- larly the short positions-would be substantially worse and the buy- and-hold results would be better). AZ with many momentum-based approaches, there are substantially more winning long trades than winning short trades - 63.6% versus only 22.5%, respectively - due to the inherent nature of using pure momentum indicators for trading. The general rise in prices over the test period prob ably exacerbated the poor performance on the short side. Table 1 Enhanced Coppock Curves - Best Of The Old Buy-And-Hold Beats Coppock Curves With A New Twist Lana Trades Short Trades Total Trades The problem then is how to retain or improve the BUY track record while eliminating asmany of the falseSELL signalsas pos- Total Winning % Total Winning___. % ~~ _~._Total _ .~_ Winning~~ .-... ..~~% sible. One solution which has proven to be very effective in our 22 14 63.6% 40 9 22.5% 62 23 37.1% study is the use of the Coppock Curve as the setup for a trade, while waiting until a specific trigger occurs before executing the trade. That trigger for this study is as follows: Buy-And-Hold Compound Annual Return 7.5% BW: The setup-whenever the Coppock Curve turns up-a Coopock Curve Compound Annual return 2.3% trough-whether or not it is below the zero line. The trigger-the closing price movesabove the candlestick body of the previous bar (seeAppendix B for a discussionof candlesticks). This is The situation is not asbad asit seemsat first glance, however. demonstratedin Chart 4 where the Coppock Curve bottomed in On closerexamination, the Coppock Curve approachhandily beat November 1984, but we had to wait until January 1985 for the a buy-and-hold approach from approximately 1973-1986 (see closing price to exceed the candlestickbody of the previous bar. Chart 2). The entry point is measuredfrom the top of the candlestickbody Chart 2 of the previous bar (this is what occurred in this example) or Some Periods Work Well With Coppock Curves... from the open of the current bar if it gaps above the top of the prebious candlestickbody. Chart 4 Buy Signal January 1985 LONGDow. cwwh -m 1431 t The arrows represent individual trades. With the exception of 1979-1980,the Coppock Curve pretty closelymatches the price action. Measuring from the initial trade in early 1973 to the last trade in late 1986, a buy-and-hold strategy would have returned SELL: The setup-whenever the Coppock Curve turns down- about 85% while the Coppock Curve technique would have re- -a peak-whether or not it is above the zero line. The trigger-the turned about 289%. closing price movesbelow the candlestick body of the previous The samecannot be said for the period of 1953-1965where bar. This is the more important example sincewe want to mini- many false sell signalsare evident, resulting in only a 122% gain mize false SELL signals.As may be seenin Chart 5, the Coppock for the period using the Coppock Curve techniquesversus a solid Curve peaked in February 1964but not until December 1964did 233% gain using buy-and-hold (seeChart 3). prices fall below the bottom of the candlestickbody of the previous bar. In this casethis approach added over 61 DJIA points, or about 37% to the trade. As in the previous example, the entry point is measuredfrom the bottom of the candlestickbody of the previous bar or from the open of the wren t bar if it gapsbelow the bottom of the previous candlestickbody, (Thy ;,ywhat OC- cmrd in this example.) MTA JOURNAL l Summer-Autumn IWQ Chart 5 longs Better Than Ever, And Big Improvement On Sell Signal December 1964 The Short Side The proof of the enhanced technique, however, is in the re- sultsdisplayed in Table 2.

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