Custom Search

Patterns

It is not only fine feathers that make fine birds. aesop

Traders have long suspected that there are certain days of the week that are more apt to be bullish or bearish. Such myths as "turnaround Tuesday" or "trouble Thursday" have circulated among traders for many years. Some traders believe that if a market closes near its high on Friday, then it will likely move higher on Monday, or vice versa if it closes near its low on Friday. But there have been few definitive studies to either support or negate these market myths. Among the valid studies are those that have been conducted by Yale Hirsch in his excellent book Don't Sell Stocks on Monday (Facts on File, 1986) and Art Merrill in his classic book The Behavior of Prices on Wall Street (Analysis Press, 1984). I consider these two books to be among the best ever written on day-of-week or date patterns. Oddly enough, as outstanding as these books are, they seem to have been ignored by many traders. If you don't believe me, then try buying them!

We know that markets also tend to exhibit certain reliable behaviors on given dates that are not necessarily major holidays. The thinking trader will always be asking why certain patterns repeat. While I am certain that there are good answers to this question, I believe that it is beyond the area that is studied by a market technician. Hence, I spend little timing thinking "why thoughts."

Examples of Key Date Seasonals

In order to demonstrate the validity of key date seasonals to you more clearly, I have included herein several examples. Let's first consider the daily seasonal tendency of T-bond futures prices from the start of futures trading in this market (Figure 5-1).

Figure 5-1. Daily seasonal tendencies in December T-bonds.

As shown in the illustration, there are three line plots on the chart. The most important of the three plots is the solid line. It shows the average direction of December T-bond futures on a day-by-day basis. Note the bottom row. This row shows the percentage of time that the market has closed higher or lower on the day. You will note that although the percentages are not particularly high on all days, some days stand out as significantly high-probability days for higher or lower closing prices (compared to the previous day).

August 9, for example, shows a reading of + 72 percent, while August 22 shows a reading of - 71 percent. (I have not preselected my sample in order to show the best probabilities. I have merely selected an active market that is traded by many traders.) The arrows up and down denote the highest probability moves of the month and their probable direction. While I am not saying that these patterns will always be valid, I do believe that there is something happening here - something that deserves the attention of all short-term and day traders.

As another example, consider Figure 5-2, the daily seasonal composite chart of S&P futures. Without a doubt, this is one of the most active and most volatile markets. The daily seasonal tendency chart shows the month of October for December S&P futures.

Note the numerous up and down arrows. There have been many days in the history of S&P futures that have shown a high-percentage reading for up or down closes (compared to the previous day). In examining the chart you will find a number of days with particularly high-percentage readings. I must point out that these statistics are somewhat questionable, since they are based on history dating back to 1982. Examining a longer history for this pattern would derive a more valid result.