5 Stock Market Seasonal Trades That Work (13:16)
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Stock market seasonality definitely exists, but can you use it day trade? Yes, I think so – but only where there is strong “fundamental” support. Not just a statistical anomaly. Here are 5 seasonal trades that have good “fundamental” support, including one that is firing right now.
“Just wanted to send a quick note to say ‘Thanks’ for the free seasonality indicators. Very cool. I’ve been focusing on swing trading lately (using your indicators, of course) and these are great additional tools.” John J.
The stock market has 2 seasonal “legs”
Weekly Seasonality Indicator on the Emini
The weekly seasonality indicator shows the stock market has two major biases each year. One up leg starting in late October and running until the end of April the following year. Then the down leg starts in early May and continues until late October.
The variation in this pattern from year to year though is huge. If you plot each year on top of each other, you’d swear there was no discernible pattern. And the annual trend can easily disguise any seasonal strength or weakness. For example, in 2013 the market continued to power ahead, even through the “sell in May and go away” traditionally weak season.
5 seasonal trades backed by fundamentals
5 Seasonal Trades Backed by Fundamentals
Within this broad seasonal pattern in the stock market, there are some great trading opportunities. If you’re not going to trade them, at least don’t bet big against them:
- Santa Clause Rally: Strength from mid-December to the first week in January. Driven by bullish holiday spirit and investment flows into value and small cap stocks.
- Tax Time: Weakness from early to mid April, followed by strength from mid to late April. Driven by profit taking in stocks to pay taxes, followed by investment flows into tax-advantaged vehicles.
- July 4th: Strength from late June until after 4th July. Driven by bullish holiday spirit.
- September Effect: Weakness from early September to late October. Driven by ‘tax loss harvesting’ by mutual funds and 3rd quarter profit warnings by corporates going to miss their year-end targets.
- Thanksgiving: Strength during late November. Driven by bullish holiday spirit.
Each of these seasonal trades has a “fundamental” reason driving investment flows and the stock market behaviour. Not unlike the stock market strength we see just before the end of the month and beginning of the next month – which is driven by end of month “window dressing” by fund managers and new investment inflows at the beginning of the new month. These big picture investment flows repeat again and again, year after year.
Use the daily seasonality indicator to ‘zero in’
Latest Tax Time Signal – 9-14 April 2014
The weekly seasonality indicator is too crude to time these seasonal trades – use the daily seasonality indicator instead. This dynamically calculates the seasonal pattern and plots the forecast for the next 3 days.
During this latest Tax Time weakness (April 2014) it warned of a strong 3-day sell-off that resulted in a 65-point down move in the Emini. And we’re in the middle of the bounce back – again, part of the Tax Time seasonal pattern – as I’m writing this. And the daily seasonality indicator is forecasting it’s got 2-3 days more to run.
Free seasonality indicators for TradeStation
I hope this video and article on stock market seasonality was helpful to you. You can download the indicator code used in this analysis from the link below. The indicator is “open” TradeStation EasyLanguage, so you can import it into TradeStation and MultiCharts. There’s also a text file with the code if you want to see how it works.
Please remember to plot the “_Seasonality Indicator” on daily charts with plenty of back history and starting on 1 January. This is necessary for the calculations to work correctly.
Good luck with your Emini trading. And if you appreciate this free code then please share this website on Twitter, Facebook, Google+ etc.