Edwin Coppock was an economist who was asked by the American Episcopal Church to identify buying opportunities for long-term investors. Coppock believed market downturns were like bereavements and required a period of mourning. He asked the Church Bishops how long it normally took for people to get over a bereavement. Their answer was 11 to 14 months, so he used those periods for his calculations.

Coppock developed a series of calculations – based on 11 and 14-month rates of price change – designed to signal when stock market mourning could be over. The indicator's signal does not emerge at the bottom, but comes as a rally is established. Supporters of the indicator claim that is has signalled rallies to the benefit of investors.

The indicator is designed for use on a monthly time scale. It is the sum of a 14 month rate of change (roc) and 11 month rate of change (roc) smoothed by a ten month period weighted moving average (wma).

Coppock = WMA (10) of (ROC(14) + ROC (11))

Coppock designed the indicator for the S& P 500 index. It has also been applied to the Dow Jones. Although it is designed for monthly use, it can be used daily also. If you log onto YouTube for 4 October 2008, the Coppock Indicator from 1950 to 2008 has correctly picked 12 long-term turning points. It also made two mistakes in that time!

How do you use the Coppock Curve or Indicator? We are creatures of habit! We always judge the world and events relative to what it is that we have experienced. For example, if we are shopping for a mortgage and rates were in the teens, as they were in the 1980s, and say they drop to ten per cent. We are elated are we not?

However, if the have been at say three per cent and they rise to five per cent, we are disappointed, yes? It all depends on your perspective. The principle of adaptation-level applies to how we judge our income levels, stock prices, and virtually every other variable in our lives. Psychologically, relativity prevails!

So what can we learn from Edwin Coppock? It is generally agreed that the Curve peaked in October 2007, coincidentally with the top of the S&P 500 Index. Given that the S&P Index held around 900 approximately to the end of May and, if it is able to hold at current levels and no further deterioration for a 60 day period, then a convergence of indicators would indicate positive signals that it will be ‘all right to get back into the pond’.

However, one needs to be clear about the indicators. The most traditional interpretation is to recognise a buy signal when the Coppock Curve 'curls' up while it is still below the zero line. In its history, only four false signals have occurred. That's an 83 per cent accuracy rate. Proceed with caution!

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