Sedgewick Coppock developed this indicator (originally known as Trendex's Timing Technique for Texas Traders) some 40 years ago, as a method for reducing risk and improving returns. To this day, it represents an extremely effective means of allowing market participation with significantly reduced risk, and we recommend it to investors who are concerned about the market. In addition, we have found that this tool may be used to trade short-term moves.
Primarily, though, it can be used in the intermediate-term, as a risk reduction tool.
Those who are so inclined can keep this indicator themselves and can find the calculations in any old issue of Trendex or its successor publication, C. W. Bleser's Market Timing Insights.
Intermediate-term Traders should Sell the Friday following any drop by the CBI of 0.3 beneath the exponential, barring any contrary buy signals. We have found that this decreases whipsaws and adds some value. We will always advise of this in the newsletters. Also, traders should buy the Friday after a move of 0.3 above the exponential, barring a contrary sell signals.
Traders should stay generally long while the bias is Positive, and generally hedged while bias is Negative. One very viable alternative to selling upon a 0.3 violation of the exponential is to then use a moving 1% stop. It is recommended that traders utilize high relative strength funds and equities.
One of the benefits of the CBI, is that it allows traders to hold more volatile funds without bearing the burden of all of the attendant risk. Reduced market risk allows investors to take increased security risk. Obviously, though, security selection should be based upon appropriate and well founded discpline. Many trend following and momentum disciplines work extremely well with the Coppock Breadth Indicator. Additionally, the CBI can be used to determine intervals when short sales should be considered. We have found that intervals of rising interest rates, negative 55-day vs. 21-day TRIN, and negative CBI represent relatively low risk shorting opportunities.
Short term traders should look for a decline when the CBI is 0.5 above the exponential, or, if on an Intermediate-term sell, upon a move by the CBI against the Exponential. Conversely, they should look for a rally when the CBI is 0.6 beneath, or if on a buy, when the CBI falls against the Exponential.
In the example above, traders would want to buy when the Coppock Breadth Indicator fell from 196.4 to 195.9, (first arrow pointing down in from the left) which was against its exponential. Similarly, when the CBI was 196.4, 0.5 above its exponential, traders would want to short in order to profit from any further decline. The up arrows indicate buys and the down arrows represent sell signals.