Lessons from the Pros


Yes Virginia, There Really is a Santa Clause Rally

There is something that can increase your chances for success in the markets that novice traders and investors tend to ignore.  This is the seasonality of the markets they trade.  Professionals are aware of the seasonality of securities and use that knowledge to select the right securities and even to time their entries and exits to maximize profits and minimize risk.

You may have heard of the term, “The Santa Clause Rally”, or the phrase, “Sell in May and go away!” There is some truth to these sayings.  They are referring to the seasonal movements in price that occur at regular time periods during the year.

Free Trading WorkshopMost novice traders and investors look myopically at the security they wish to trade.  They may look at the financial data from the company itself, or the chart of the security they are trading.  However, they tend to ignore the outside influences that can affect their trades such as seasonal patterns and related securities.

There are seasons for all securities:

  • Spring – Prices are starting their bullish rise.
  • Summer – The bull market and then the start of a slowdown and sideways consolidation
  • Autumn – Prices begin to fall
  • Winter – The full bear market before the slowing and sideways consolidation

When you are looking for the seasonal pattern for a security, you are want to at the average price movement every year for at least 10 years.  Anything less would not be accurate.  Some web based seasonal services even average the price movement for up to 30 years.

There are seasonal patterns in the stock market.

The chart above shows the seasonal pattern for the Nasdaq 100 index.  The seasonal names, (spring, summer, autumn, winter), do not correlate to the calendar seasons.  Rather, they describe the price action of the security.  The spring for oil prices will occur in a different month than spring for the S&P 500.  Oil will see prices rise when demand is strongest and drop when it is weakest.

Knowing seasonal patterns of the markets and securities we trade offers longer-term traders and investors a distinct advantage. When our weekly or monthly charts are approaching a supply or demand zone at the same time the season for that security is changing, we can increase our odds for successfully identifying the trend change.  For example, if the season is contrary to the zones (approaching a supply zone in the spring season) we may break the zone instead of reversing.

The drawback to using seasonality is that there may be a cost to obtain the information.  Several services are available online and offer charts to identify the seasonal patterns for indexes and commodities for a fee. If you can use this data to increase your profitability in the markets, the cost can be well worth it.

The seasonality should only be used to compliment Online Trading Academy’s core strategy.  Trying to invest solely on seasonality could lead to losses.  You can improve your trading and investing success by combining this seasonal analysis to the application of core strategy on your long-term charts.  To learn what analysis is required, enroll in a course at your local Online Trading Academy center today.

I want to wish everyone happy holidays and a safe and prosperous New Year!

Brandon Wendell – bwendell@tradingacademy.com

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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