By a couple of different measures, my preferred momentum indicator, the Coppock Guide, suggests the short-term (daily) uptrend evident in the S&P 500 may have more room to run. At the intermediate degree, momentum also appears supportive, but less so. Taken together, short- and intermediate-term momentum paint a picture of additional upside over the very near term, likely followed by renewed weakness.

The Coppock Guide was developed by economist Edwin Coppock in response to a request from the Episcopalian Church for a long-term buy signal to be applied to the Dow Jones Industrial Average. Over the years, Coppock’s measure has proven to be immensely accurate to its original purpose. PowerStocks Research suggests that the Coppock Guide boasts an 87% accuracy rate since 1920. Click here to learn more about Edwin Coppock and the Coppock Guide measure of momentum. Following in the footsteps of Walter Murphy, of WM Insights, and other technicians, I have adapted an interpretation of Coppock Guide patterns that indicates periods of consolidation or correction as well as highlights buy opportunities.

A method I commonly use to gauge the Coppock Guide’s likely future path is to calculate the number of periods the current momentum trend would persist assuming no further changes in the level of the underlying security or index (henceforth referred to as static-price analysis). This value offers a quantitative assessment of the velocity embedded in the trend, absent any additional influence. As of today, this measure for short-term momentum hints at another week or so of support to equities prices (specifically, the estimated turning point is December 15th). The following chart shows S&P 500 prices as well as the short- and intermediate-term Coppock Guides for the index. The dotted violet portion of the daily Coppock (in the middle pane) shows the expected turn in short-term momentum. Collectively the top two panes demonstrate a historical account of the relationship between prices and short-term momentum.

To test conclusions drawn from the static-price analysis, I also calculated Bollinger Bands for the daily Coppock Curve. Bollinger Bands were developed in the 1980s by John Bollinger for the purpose of providing a relative definition of high and low prices. John Bollinger expressly endorses the application of his bands to momentum and other indicators, and I believe the Bollinger Bands enhance my broader usage framework for Coppock Guides by adding a dynamic quantification of overbought and oversold.

At any rate, in this case, the Bollinger methodology entails overlaying three curves on the Coppock charts. The first addition is a simple 20-period moving average. The other two lines, the upper and lower boundaries (or the overbought/oversold indicators), are generated by calculating the moving average ± two standard deviations (for more information on John Bollinger and Bollinger Bands, click here). The following chart shows the data from the first chart, but includes Bollinger Bands on the Coppock Series.

A review of the daily Coppock Curve through the Bollinger Band framework suggests that short-term momentum’s current level is only slightly above neutral (the 20-day moving average is considered neutral), consistent with the idea that the uptrend can continue (until overbought levels are recorded).

The intermediate-term view of momentum, based on weekly rather than daily data, is optimistic only at the margin. The static-price approach hints that momentum’s run at this degree is quite mature, but not quite complete. The weekly Coppock is likely to improve materially this week and next, and then modestly thereafter, as the peaking process initiates.

The Bollinger Band perspective suggests that intermediate-term momentum is close to overbought (approaching to the upper Bollinger boundary). However, Bollinger’s rules acknowledge that in trending markets, after price touches one of the boundaries the data may move in sync with that border for a time. This manner of action would be compatible with the static-price estimation of another four weeks or so of support, although a market peak roughly coincident with a peak in short-term momentum in a week or so appears to me to be the most cozy outcome right now—perhaps this view fits too well with the current data to eventuate though.

Also of note, an examination of Coppock momentum highlights two divergences. Divergences arise when price’s path departs from the course of another indicator when the two are expected to move in tandem. Divergences are technically significant because they may help to identify a coming change in trend (when corroborated by other technical evidence). Click here to learn more about divergences.

Back to the first chart, note that the between mid-March and early-May, the S&P rallied, then corrected, and then rallied again (refer to the red indications on the chart). The May run achieved a higher high than did the April advance, however the May peak in momentum was lower than the April peak. This confluence of conditions constituted a negative divergence, which foreshadowed the particularly deep decline that followed.

Alternatively, the lower price low in October versus the August low, in conjunction with the higher October peak in momentum compared to August formed a positive divergence (see the green indications on the first chart) and encourages my confidence in at least the very near-term prospects for additionalequity market gains.

More to come about exactly how much more to expect.