March 25th, 2009
How will we know when the market actually hits bottom? Which indicators told us that the market had hit peaks in the past and can those same indicators tell us when we hit a bottom?
Those are questions that investors have been asking almost since the beginning. First there was Charles Dow who, through a long series of articles in his Wall Street Journal formulated what would later be called the Dow Theory. A Dow contemporary was Richard Wyckoff who, around 1907, “cobbled together his concepts in a less technologically sophisticated era (he strongly advocated careful “tape reading” to get a feel of market direction and momentum)”. I inserted a chart of Wyckoff’s principals in “A Selling Climax Behind Us?” written on November 24, 2008.
Another was Edwin Coppock who developed an indicator, later dubbed the Coppock Curve (or “Guide”). The Guide is not for short-term traders since it attempts to measure major turns in market momentum. As I wrote on January 8, I first ran across Coppock’s Curve while reading “Coppock Guide Update & Forecast for 2009” at Trader’s Narrative and wrote: “As recently as July 27, 2007, Forbes.com ran a story based on the Coppock Guide that turned out to be fairly prescient and unfortunate because, believe it or not, the Coppock Guide was indicating a turn in market sentiment and momentum to the negative.”
So what does Coppock’s Guide indicate now? What does the Curve now say about the possibility of a turn in market momentum? Pictures (or charts) are worth a thousand words and the a chart of Coppock’s Curve is quite revealing:
The above chart uses the Coppock methodology, indicates that the Curve peaked in October, 2007, coincidentally with the top of the S&P 500 Index. I’ve also extrapolated what the Curve values might be if the S&P 500 Index is able to hold at approximately 900 through the end of May. Interestingly, the Curve hits a low in April and begins to turn up in May.
So long as there’s no further deterioration in the market, and the S&P 500 Index can hold current levels for the next 60 days, there’s a convergence of indicators that will point to a positive signal at that time that it will be “all right to get back into the pool”. Among those indicators are the Coppock Curve, the 200-day Moving Average crossover, my MTI, and the long-term reversion to the mean chart.