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Seasonals

Seasonality also has a lengthy research history. It is based on the valid and fundamentally sound idea that prices repeat their patterns within the course of a year, based on a variety of causes such as weather, supply, demand, and consumption.

Seasonals appear in monthly, weekly, and daily data. Seasonal patterns can also be found in spreads and in ratios. But the good news for the day trader is that there are also seasonals on a daily basis. We know for a fact that certain markets have shown a high probability of closing in a given direction on certain dates of the year and at certain times of the year. Such date-specific seasonal tendencies have occurred with very high degrees of accuracy in the stock market and in stock index futures. There are several schools of thought on how best to study the history of such seasonals.

The Good News. Seasonals are often specific and capable of being tested historically as well as validated mathematically. Seasonals can be used with or without intraday riming. Seasonals can also be validated with respect to current factors to determine if they are likely to develop in the present year.

The Bad News. Seasonals have gotten a bad reputation in the last 10 years because of slick and dishonest sales practices by various futures options firms. This should not dissuade you from using seasonals, provided they are based on sufficient data.

In addition, several firms publish seasonal data based on limited history. The historical results of such seasonals are also suspect, so be careful. For an example of daily seasonal tendencies, see Figure 2-10. It shows percentage of time up or down closings over the last 19 years in June Treasury bond futures. Note that the percentages that appear in the bottom row are calculated on a daily-close to daily-close basis. The line plots show the average seasonal trend for the time frame indicated.

Solutions. Use daily seasonals with intraday timing indicators or with trend indicators as a filter. (This will not always work, however.) Also use seasonals that are based only on a lengthy history base. In some cases there is only a base of 15 years. Try to avoid seasonals with less than 15 years of history. If you use futures options with seasonals, then use at-the-money or close-to-the-money options. Generally speaking, however, I advise against the use of futures options for the purpose of day trading.

Remember that seasonals are not perfect - they do take losses no matter how high their historical reliability may

have been.