Wednesday, December 14, 2011

Bottom? - MACD and Coppock review

International stock markets have almost universally experienced a bear market over the last 3 to 9 months.

The question for most investors is now "Has it bottomed? Should I buy more shares?"

The Coppock Indicator was designed to answer that very question on a reasonably conservative basis, that is with few false readings. The MACD (Moving Average Convergence Divergence ) Indicator can also be used for bottom picking, but is more prone to being whipsawn or unclear. Links to the relevant Wikipedia pages for more explanation:
b) Coppock

I use non-traditional settings for both these indicators. I am not trying to pick the absolute bottom, just to ensure I buy comparatively cheaply. Using indicators like these always misses the bottom as they follow the price.

Coppock is usually monthly using 14,11,10. I use 11,8,7 as it gives a slightly faster signal. It was designed only for picking new uptrends after major bottoms, not for picking downtrends from major tops.

MACD is often daily 12,26,9 . For looking for major bottoms I use 170,150, 20 as it reduces whipsawing and provides rare signals that generally indicate major bottoms.

Using Incredible Charts I reviewed most major world markets and have prepared a very simple matrix looking at whether either MACD or Coppock are indicating that it is time to buy.

The answer is clearly that while a bottom might be forming and some markets are indicating a BUY on the basis of MACD, there are NO BUY indications from the Coppock Indicator. I have used Undecided where the MACD has barely crossed its signal line or they are running over one another or are horizontal and for Coppock where it is flat.

Colin Nicholson on his site Building Wealth Through Shares has a spreadsheet available with the Coppock indicator for 6 major markets.

Here are 3 charts derived from that data. The first is the Coppock indicator for the All Ordinaries since the early 1900's.

The second is a bar chart for the recent values so that it is clear when the indicator reverses direction from below the zero line.

The third chart shows the Percentiles of the Coppock for the All Ordinaries. It should be noted that other markets can show a much greater range and a very different distribution.

We are at a point in time where it should be well worth while to mnoitor the MACD and Coppock indicators to identify the point which will likely be the start of a major uptrend. This point could be in the next month or so as it appears a bottom is forming in some markets, or we could follow the 1987 to 1991 pattern in which case the bottom could be substantially lower and many months away.

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