What To Watch For

You must remember that these charts are composites, or a combination of many years of prices. As such, extreme highs and extreme lows during the same period of time in different years tend to balance each other out. The net result will be a relatively even line on the seasonal chart. This is valuable information since it shows us that the market is not seasonal at given times of the year. We can then reasonably assume that the existing trend will be the single most reliable factor as opposed to seasonality. We can also assume that once a trend starts it should continue. It is best not to rely on Seasonals when this occurs. Note also that relative highs and lows within the composite chart are not necessarily repeated in any actual year’s market. Some years may look exactly like the seasonal composite charts and others may not. A low may or may not occur at a given time period. But this does not mean that the seasonal chart is not valid. In using these charts there are several things you should look for.

  1. VERY STRONG UP OR DOWN WEEKS. By “very strong” we mean reliabilities in excess of 70% over 10 years or more.
  2. DURING LONG TERM UP OR DOWN TRENDS Seasonals consistent with the existing trend should perform well.
  3. SEASONAL HIGHS AND LOWS can be estimated by reference to the chart and in accordance with the guidelines outlined previously.
  4. CONTRA-SEASONAL MOVES in the actual market can be spotted. If a particular market shows highly reliable seasonality on the composite, and if this pattern fails to appear in the actual market for any given year, then a further move in the contra-seasonal direction can be expected. This is perhaps one of the most important uses of a seasonal chart.
  5. MARKET TURNS can be expected at certain times of the year. If the market is moving down, and the seasonal chart shows a very high percentage reliability down move followed by a large up move reliability, then one should be on the lookout for a trend change in the market.

There are many other uses of this information. Applications are limited perhaps only by the imagination and resourcefulness of the trader. In general, it is best used in conjunction with trading systems, technical or fundamental.

High Reliability Weekly Runs

Many of the seasonal composites show a several week span of high reliability percentage readings. We call such periods “seasonal runs”. They are typically a good period of time for high probability seasonal trends. An example of such a seasonal run might be as follows: (weekly readings), 69%, 75%, 68%, 45%, 78%, 69%, 50%, 33%, and 79%.

This is a very strong seasonal up trend which is interrupted only by a few low reliability readings. The longer term trader might establish and hold a position through this seasonal uptrend. Watch for these runs. They often pinpoint the most reliable seasonal moves.

Seasonal price patterns are by no means the only reliable market cycles. At major long term tops and bottoms seasonal cycles may be distorted. If you are aware of the long cyclical term patterns within which Seasonals function, you can be prepared well in advance for a period of time during which Seasonals may become unreliable.

You must remember, above all, that when one extracts a part from the whole, an unnatural distortion of the original data may result. Consequently, when the analysis is over, and we have gleaned the necessary information, the part must be replaced within the whole.

A total picture is necessary in the formulation of any long-range decision. A student of Seasonals should also strive to be a student of cycles.

 

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