Since 1987 I have been tracking small trader market sentiment daily, correlating its readings in var...
The Four Key Seasonal Trends for 2012
12/01/2011 4:00 pm EST
Craft an effective approach for the year ahead armed with knowledge about these proven seasonal patterns, which commonly affect equities, commodities, and currency markets.
Over the past few years, there has been more discussion of the seasonal patterns in the financial markets. In the 1980s and 1990s, the seasonal research was concentrated on the commodity markets, as many veteran commodity traders were familiar with seasonal tendencies in the grains, meats, and soft commodities.
My first exposure to seasonal analysis was in the early 1990s through Steve Moore of the Moore Research Center, which provides extensive research into seasonal trends and how they can be used to trade commodity spreads.
Several years ago, I became more intrigued with seasonal analysis after several interviews with John Person, who has done extensive seasonal work on commodities as well as individual stocks and sectors.
During his interviews, John would often make seasonal references in his market analysis, and it was a November 2009 interview that really got my attention. In that interview, he told me that gold, which was currently rallying sharply, typically forms a short-term top at beginning of December. A couple weeks later, on December 3, 2009, gold made a high of $1227.50 and dropped below $1075 over the next 13 days.
I subsequently reviewed the Commodity Traders Almanac, which is co-edited by John. Now, if I have a question on seasonal analysis, I turn to him, as he has been kind enough to share with me his knowledge of the seasonal trends that he has gleaned in over 30 years of trading.
Modern software analysis does make identifying seasonal trends easier, and in this lesson, I will be using charts from Trade Navigator, which is a product of Genesis Financial Technologies, Inc.
It is important to note that these are best referred to as seasonal trends or tendencies since the markets do not follow these patterns every year. The analysis just reveals that statistically these patterns are the dominant ones.
I use some of my favorite indicators such as on-balance volume (OBV) and/or the Advance/Decline (A/D) line to confirm that the markets have indeed turned. This can be a very powerful combination. The seasonal trends in these four key markets are the ones that every investor and trader should mark on their calendars as we head into 2012.
NEXT: Seasonal Trend #1: Crude Oil|pagebreak|
The first chart I would like to share with you is a long-term chart of crude oil futures using the perpetual, or continuous contract. It covers the period from 2007 to the present because I wanted to demonstrate not only the validity of the seasonal trends, but also to point out some of the times when crude did not follow the typical seasonal pattern.
In mid-January 2007, crude oil made a low of $51.03 and then started a major rally. The chart of the seasonal trend shows that crude oil typically bottoms in February, as indicated by line 1. Crude oil rallied almost 50% in the next six months and did not top out for 2007 until August. Crude oil typically tops at the end of July, line 2.
There was a sharp but brief correction in crude oil before it rose from $68 per barrel to almost $96 a barrel by the end of the year. The next seasonal low in February 2008 coincided with the completion of a continuation pattern (line 3) as crude oil then accelerated to the upside.
The next seasonal top in July 2008 (line 4) came very close to the price peak at over $140 per barrel and coincided with an extreme level of bullishness. The ensuing plunge in prices caught many by surprise, but those who followed the seasonal trends were better prepared.
Crude oil plunged for the rest of the year, dropping below $40 a barrel in late 2009, and by the seasonal low in February (point 5), it was trading near $46 a barrel. This was almost $100 below the July 2008 high.
The seasonal low was right on target, as crude oil prices did rally into July 2009 (point 6), but after a sharp, four-week correction, it again accelerated to the upside. Crude oil had a $12 correction going into the next seasonal low in February 2010, but in May, it peaked just below $90 per barrel.
The July 2010 seasonal peak coincided with a sideways pattern in crude oil that was completed in the fall when crude oil again started to move higher. Oil prices consolidated in early 2011, which corresponded to the seasonal low in February 2011.
In May 2011, crude oil prices topped out, which was several months ahead of the typical July seasonal peak (point 8). The May high was identified by the OBV analysis of the Select Sector SPDR - Energy (XLE), as discussed previously in "Big Oil's Big Top."
Crude oil was already dropping sharply by July (the normal seasonal high) and declined into the October low. In October, the charts suggested that a double-bottom formation was occurring, and that formation was completed in the latter part of October.
In many instances, I have noticed that when a market is already declining during a period that is normally associated with a seasonal top, the decline will often accelerate. Similarly, if a market is rising into a seasonal low, prices will often accelerate to the upside.
The $25 rally in crude oil from the October 2011 lows suggests the next seasonal low (due in February) could coincide with the pause in crude oil's uptrend and may provide a good entry point for the energy sector.
NEXT: Seasonal Trend #2: Gold|pagebreak|
Gold's dramatic rally from the 1999 lows near $250 per ounce to over $1900 has gotten the attention of even part-time investors and traders. Using the long history of the gold futures, we can analyze 30 years of data to determine the seasonal patterns. In fact, the last major top in gold prices fit the seasonal pattern quite nicely.
The above chart covers the Comex gold futures from the middle of 1978 through early 1980. The historical seasonal analysis reveals that typically, gold prices bottom in July and top out in February.
At the end of July 1979, gold was trading at about $300 per ounce, line a. By the last week in January, 1980, gold had reached a high of $873 per ounce, line b. The bearish candle formation as the highs were being formed was also consistent with a significant top even though candle charts were not being used at that time. Of course, the widely followed SPDR Gold Trust (GLD) follows the same seasonal pattern as the gold futures.
In 2003, the seasonal trends fit the gold's price action almost perfectly. The daily chart covers the period from November 2002 through December 2003. Gold peaked on February 5, 2003 at $371.20 (point 1). The initial decline took gold to a low of $320.10 on April 7, 2003, point 2.
The secondary high in May failed just above $370 and formed the downtrend, line a, which was later to become part of a triangle formation. The secondary low in July was well above the April low and formed the lower boundary of the triangle, or flag formation.
See related: Profit from Flag Formations
Gold fell back sharply into the end of July, and by the end of August, it had convincingly broken out of its triangle formation. Gold peaked ahead of schedule in early-January 2004 at $431 per ounce.
NEXT: Seasonal Analysis for Gold Continues|pagebreak|
Of course, in very strong bull or bear markets, we must rely on technical indicators that can stay with strongly trending markets, as momentum indicators like the Moving Average Convergence Divergence (MACD) indicator or Relative Strength Index (RSI) will top or bottom out well ahead of prices.
See related: Demystifying the MACD Indicator
The current chart of gold futures shows that in 2011, gold prices did not always adhere to the typical seasonal pattern. At the end of 2010, gold prices were in a broad trading range and just broke through resistance, line a, when gold typically forms a seasonal top (line 1).
The downward seasonal trend in March corresponded to sideways price action before gold turned higher in April. The rally lasted into early May, when gold reached $1577.40. For the next two months, gold traced out another flag, or continuation pattern, lines b and c.
The flag formation was completed on July 12, and by the end of July, gold prices were moving sharply higher. Gold then accelerated the upside over the next month, peaking in September at $1920 per ounce.
As you can see from the chart, the rather sharp correction from the September peak occurred during a seasonally strong period, but since the initial plunge, gold prices have again begun to edge higher. A move above the November highs at $1804.40 could suggest a test of the all-time highs by February 2012.
If gold does rally sharply into February, then I will be watching technical indicators like the on-balance volume (OBV) to assess the strength of gold's trend. The weekly OBV did a good job of identifying the September 2011 peak.
See related: OBV: Perfect Indicator for All Markets
NEXT: Seasonal Trend #3: Equity Markets|pagebreak|
With several-hundred-point swings in the stock market just this week, the seasonal trends in stocks should be of particular interest as we head into the New Year. I am sure most of you have heard the old adage "Sell in May and Go Away," and this phrase comes from the seasonal pattern for the stock market. The above chart of the cash S&P 500 uses data that goes back to 1930.
The seasonal pattern dictates that stocks will typically bottom in November and then rally up through May. The minor seasonal trend analysis indicates that we often see a rally from late June through July like we did this year. Sometimes the rally carries through August, but the market should be watched closely at this time because the seasonal trend drops sharply in September, which is the weakest month of the year for stocks.
In 2010, there was a sharp setback from the early-November highs, but by December, the rally had resumed. The S&P 500 rose from a low of 1174 to a high on May 2, 2011 of 1370.58. By the middle of May, stocks had turned lower and the first wave of selling took prices into the June lows.
There is a slight upward bias in the seasonal trend from June through July, and this year's rally fit the pattern nicely.
The steep decline of the seasonal trend in September was consistent with the sharp market decline leading up to the October 2011 lows. The recent burst of upside momentum suggests that stocks will challenge the late-October highs at 1292.66. A convincing move above this level is needed to suggest a test of the July highs in the 1347-1356 area.
As for the start of 2012, we typically see a slight pullback in the latter part of January and also in late February, but then look for a rally from the March lows that should carry over to the latter part of April or through May. I would not necessarily count on a May top this year, because after two years, the investing public is likely fixated on selling in May, which makes it less likely that strategy will be as successful in the coming year.
NEXT: Seasonal Trend #4: Currency Markets|pagebreak|
The fear of contagion from the European debt crisis has increased the focus on the euro currency, which typically peaks in late December or early January. From the chart above, you can see that the strongest seasonal period for the euro is from September to the end of the year, line a.
From a high in late December or early January, the euro often has an initial decline into February before it bounces. The euro then resumes its decline, making a final bottom in the August-to-September time frame.
The current chart shows that the euro was already dropping at the start of 2010 and declined from 1.43 in January to a low of 1.21 in June. The euro then turned higher and was rising before making its typical seasonal low later in the summer.
This year, the euro did not fit the typical seasonal pattern, as after a sharp drop in January, it then moved sharply higher, peaking in May. The rebound this October came a bit after the typical seasonal bottom. The debt crisis in the Europe has pushed the euro back to the October lows, and a decisive break of the October lows in early 2012 could trigger heavier selling.
The seasonal patterns also present some good opportunities for short-term traders. One trade from the Commodity Trader's Almanac was to sell the euro on the third trading day of the New Year and hold the position for 26 trading days.
In the past 12 years, this trade has been profitable 11 times. Of course, as John Person jokingly told me, "Now that you are writing about it, it probably won't work this year!" He added that with Europe's current fiscal, woes he is "keeping a close eye on it."
Now that you are aware of the key seasonal turning points for these four markets, you can add seasonality as another tool to use when making your investing decisions. For example, if you are looking at establishing a long position during a seasonal topping period, I would recommend you look more closely at your analysis to be sure the market is technically strong and that your risk is well controlled.
Also, I suggest examining the price action during the periods when prices did not follow the typical seasonal patterns. In the examples I have provided, you will notice that continuation patterns are often formed when a market is typically supposed to top or bottom. By studying past examples, you will be better prepared to handle similar situations in the future.
In the stock market, you will often see extremes in sentiment as the market approaches either a seasonal top or bottom. You can then use this information in conjunction with signals from the A/D indicators to identify turning points.
Before the market's sharp selloff on October 4, the bearish sentiment was very high for both the stock market and the economy. This combined with the seasonal tendency for stocks to bottom in November made the positive signals from the A/D indicators even stronger.
Tom Aspray, professional trader and analyst, serves as senior editor for MoneyShow.com. The views expressed here are his own. Readers can post questions or feedback in the comments area below or send to TomAspray@MoneyShow.com.
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