Custom Search

How Seasonality Influences Markets

A seasonal price tendency is the tendency of a market to move in a given direction at given times of the year. Seasonal price tendencies exert a sigВэnificant influence in all markets. Although some markets are more prone to react on a seasonal basis, I know no markets which are totally immune from such responses. The day trader who is familiar with seasonality can use it to his or her advantage. Seasonal influences cause markets to move in a given direction a large majority of the time during certain weeks, months, and even calendar dates. Art Merrill, in his classic book, The Behavior of Prices on Wall Street (Analysis Press, Chappaqua, New York), demonstrated this phenomenon statistically. He proved definitively that the Dow Jones Industrial Average was prone to close higher the day before certain holidays a large percentage of the time. His statistical base dated back over 100 years, and thus the odds that his findings were ranВэdom events or chance results were less than 1 in 10,000.

Defining Key Seasonal Dates

My work with futures markets has revealed essentially similar results to those of Merrill, and these results may be used to the distinct advantage of the day trader. Specifically, I am referring to the use of what I have termed key seasonal dates. A key seasonal date is a date on which a given market has shown a strong tendency to close higher or lower a large percentage of the time. There are many such dates throughout the year, but not all are reliable. The larger the number of cases we have observed, the more reliable the key date. As an example, consider the chart in Figure 16-1. It shows the daily seasonal tendency for March copper futures. As you can see, I've marked certain dates with arrows up and down. The numbers inside the squares show date, and above these numbers appears the percentage of time the given market has closed up or down on this day. Naturally if the market is closed on a given date then the reading cannot be used for trading this year.

The solid line plot shows the seasonal tendency. Arrows up and arrows down mark dates which have shown a strong percentage of time up or down. By this I mean that the arrows up show dates on which the closing price has been higher a large percentage of the time whereas arrows down show markets which closed lower on this date a large perВэcentage of the time. The exact percentage appears in the box above the date. Although there are many arrows up and down, this does not guarВэantee that the market will move in its anticipated direction this year.