Lessons from the Pros


Futures Turn Around in February?

I’m sure I will get a lot of doubters reading this article.  Seems the majority of traders you talk to are very bearish on the Commodity and Stock markets at the moment.  And that is a good thing if you are bullish.  I love watching shorts scramble to cover their positions because they thought the markets were going to zero.

Unfortunately, too many traders are like lemmings and follow some guru or herd right off the edge of the bridge.  Trading is a thinking game and using some common sense is very beneficial.

Free Trading WorkshopNo market goes straight up or straight down, but they move in cycles of different durations causing price to move in large impulse waves (direction of the trend) and short choppy corrective waves (countertrend moves).  I’m a trend follower type of trader, but I also follow Seasonal patterns and keep up with macro fundamental events pertaining to markets I’m trading.

I was talking with some traders the other day and the price of oil came up.  They could not let go of the fact that Iran is going to start pumping oil and flooding an already crowded market.  I always appreciate another trader’s opinion because that is what makes a market: differences of opinion.  My response was, “News like that is already in the market and has been discounted.”  In the oil market the news of too much oil is as saturated as the tankers trying to hold all of this oil, everybody knows it.  The money has been made on that side of the trade.  Markets are discounting and forward looking mechanisms.

The markets will not wait until there are obvious physical signs that the inventories are low in oil before it rallies.  Keep in mind, I’m not looking for $100 oil anytime soon, but a bounce in price is possible in the future and worth trading if it does, in my opinion.

Note: This is not a trade recommendation.  I write this for purposes of getting a trader to think out of the box and use this for educational purposes only.  I currently have long positions in the Energy market.

Moore Research (MRCI) is a research company on Seasonal patterns in the Futures markets that I use.  If you are interested in a trial subscription they are still offering OTA students a 10% discount after the two week free trial.  Each month, they offer approximately 15 outright and Spread trading research ideas.

This month has some interesting patterns.  MRCI has found that in the month of February Gasoline, Nasdaq, Crude Oil, Canadian Dollar and the Australian Dollar have all rallied between 80% and 93% of the time over the past 15 years.

Looking at this and thinking in terms of correlations got me thinking about how closely correlated these markets have been trading in the past.  The MRCI website has a free market correlation page. Looking at this correlation page I found that over the last 60 trading days these markets have had the following correlations to one another:

Futures correlations sourced from MRCI

By combining the strong Seasonal tendency that MRCI has identified and the strong market correlations between all of these Seasonal Buy markets, I can see a reason for these markets to turn up in February (excluding the Treasury Bonds).

The Treasury Bonds have a Seasonal Sell this month as well, and looking at how the inverse correlation is at -90% this suggests the Bonds should be going in different directions than the Nasdaq market. Considering how far the Bond market has rallied this trend could be getting weak.

Looking back to the last Quarter of 2015, there was an auto sales report that showed the largest auto sales for a 4th quarter.  Typically Energy prices rally into the spring driving season as refiners refine gasoline for the busy summer driving season.  My question is, “Do you think that the largest auto sales report will have cars sitting in driveways or out on our nation’s highways this summer with low gasoline prices?”

“Believe you can and you’re halfway there.” Theodore Roosevelt

Don Dawson

DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.

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