Ivory Tower Charting is a type of charting where the analyst does not want their interpretation of the charts to be influenced by any knowledge of the fundamentals. So let us forget the fundamentals and study the charts.
Above is a chart of the Nasdaq Composite index, a broad-based bellwether of US stock trends. I have marked the important Coppock buy and sell signals with red and blue smileys. Buy signals presage a bullish period for stocks, while red smileys usher in turbulence.
An active investor might decide to be 100% invested after blue smileys and go 100% liquid after red ones.
Bunching of the moving averages can confirm/ reinforce these signals. Looking at the chart, the Coppock signals do work well. They keep you fully invested in strong markets and greatly reduce the risk of loss in falling markets.
They also remove emotion from investment decisions. CEOs are salespeople, always trying to reassure the world that their company is outstanding; that is part of their job. Founder CEOs are especially good at this because of their experience in raising money from wary investors when their business is little more than a wing and a prayer.
This makes them very persuasive. That is why I will avoid shares without good charts, no matter what the CEO is saying. The objective truth about stock markets is that the charts are not encouraging. A serious piece of unexpected bad news could make markets plummet.
Over the long haul, experience tells us that US markets will climb, driven by the power and flexibility of US capitalism and the US economy. Founder CEOs who become multibillionaires don’t do it by repeatedly buying and selling shares in the companies they launched. They keep faith through thick and thin and are richly rewarded.
Ordinary mortals can follow their example, but they can also use Coppock to sit in cash during market turbulence.
The Nasdaq 100 Technology index provides an even more vivid example of how well Coppock can anticipate the twists and turns of the market. We have just had a sharp rally, including one incredible day when Trump blinked on tariffs and shares rocketed (nearly 12pc in a day for the Nasdaq Composite), but so far, the only hint of a buy signal is the candlestick with a long trailing tail. Japanese analysts use this to signal turning points.
All the other indicators, Coppock, moving averages, and the broken blue trend line offer no comfort. Stock markets can always do anything. Jesus might descend from the heavens and be a follower of Adam Smith. But, other things being equal, as the economists love to say, the best guess is that this period of turbulence is not over yet. U.S. stock markets lost momentum in May 2024 and have yet to regain it.
Arguably, the best indicator of all is plotting Coppock for the leveraged QQQ3 ETF (three times the Nasdaq 100, daily rebalanced). Buying on a blue and selling on a red would have delivered fabulous results while avoiding all the stress over agonising whether to sell or not.
Strategy – Watch Coppock
It reminds me of the children’s game – Simon Says. Only instructions preceded by the words Simon Says should be obeyed. If you follow instructions not starting with Simon Says you are eliminated. The winner is the last one standing. It is harder than it sounds and great fun.
Coppock is like Simon Says. When Coppock turns down Simon Says, sell. When it turns up, Simon Says buy. All other signals are to be disregarded. Looking at the QQQ3 chart, it is a good idea to follow Coppock. The problem for active investors is that it means long periods of inactivity, ‘masterly inactivity’ as Warren Buffett once described such periods.
It is like bears that hibernate during the winter. It works for them.
