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The Seasonal Nature of Markets.

Seasonal Charting

I think it is pretty much common knowledge that the futures markets have a distinct seasonal nature to each and every contract. This is obviously most apparent in the commodity groups which have seasonal growing times, such as wheat, corn, cotton, orange juice, etc...etc...but even the financial markets have a seasonal pattern that they tend to follow.

Of course, with the more traditional commodity groups, it is easy to see the seasonal nature and trends that could arise. Let's take wheat for example; there is a time for planting, a time for growing, and a time for harvesting, and these events happen on almost the same dates each and every year, and in so doing, cause the markets to react to these events in basically the same manner year after year after year. Now of course their are always exceptions to this rule, such as a bad drought year, or a flood year, but on the whole, if you look back over 20, or 25 years, your going to get a general feeling for when markets are going to rise or fall based on the events surrounding the planting and harvesting seasons, what we call a "normal" year.

Now of course, as technical chartists and commodity speculators, we want to be able to take a look at these fundamental events, and be able to effectively use these trends to help guide us in our trading. The best way to use this information is to combine the fundamental nature of the markets with technical reoccurring price patterns and indicators. Therefore, the number one rule you want to keep in mind when using the fundamental or historical nature of any commodity chart and you plan on combining it with the reoccurring technical price pattern method of trading is this: "When a reoccurring price pattern gives you a buy or a sell signal in the opposite direction of the underlying fundamental nature of a market, it is not wise to take that position." That my friends, is the key to using the seasonal nature of market momentum and price prediction.

Let me give you an examples. Let's say that over the past 20 years, corn has gone down in price during the months of April. This is represented to us by looking at our seasonal chart. (See example below.)

Now if our seasonal chart is going down in the month of April, and we are looking at what appears to be a 123 bottom formation in our daily chart, it would not be wise to place an order to go long on a break above the 123 formation. This is how we use the historical averages and seasonal / fundamental nature of the commodity to technically trade the markets.

Our seasonal charts depicted in Track 'n Trade Pro, are using the Seasonals Software Plug-In, and are a pictorial presentation of the normal behavior of the markets. The charts are made for specific contract months, so that the trader can see the behavior of the specific contract they are looking at. This detail is of the utmost importance in markets with new and old crop contracts, such as the agricultural commodities.

The charts depict behavior on a relative basis, meaning the actual prices are not forecast, just the relative position of the market versus its contract high and low. On the seasonal charts, the high is depicted as 1.0, or 100%, while the low is depicted as 0.0 or 0%. All similar trading days are lined up for X number of years (like 15 years) and are analyzed in terms of where each day falls as a percentage of the highest and lowest price of either the last 12 months or the life of the contract for each specific contract. These prices are then averaged and the average is depicted in the indicator window. When the trend line is at 100% or 1.0, it indicates where the contract has on average been at it's highest value for specified time range and scale period. When the trend line is at 0% or 0.0, it indicates where the contract has on average been at it's lowest value for the specified time range and scale period. The averages use data from all previous years and are not affected by the current year's trend.

Historical price averages lay over the top of the actual price chart, while the Seasonals average is ranked on a scale between 0 and 100 below the chart.

Historical Average:

The Historical Average seasonal charts depicted above is similar to our moving average indicator, except that they are based on the average price of the specific contract lined up by date. The charts are made for specific contract months, so that the trader can see the behavior of the specific contract they are looking at. This detail is of the utmost importance in markets with new and old crop contracts, such as the agricultural commodities.

Unlike the seasonal average prices, the Historic Average lines depicted in this feature are based on price, not a relative basis. In essence, what this feature does is give you the average price on a specific day. This chart will have the same basic feel and theme as the seasonal chart, except instead of prices being scaled on a relative basis (0 to 100%) they are the average historical price for that day.

This feature also may help traders divine value in a commodity, in that with a quick look not only can the trader see how current prices line versus average prices historically, but they can also see seasonal trends. By simply checking the Historical Average check box within the Seasonals tab, displays the average line in the main chart window. You may also change the number of years, the color, and line style in which the indicator is displayed. The weighted box can be selected to provide more significance to the latter years than the earlier years. The un-weighted is a simple average, giving equal significants to each year included in the study.

I wish you happy trading, and hope this new seasonal software plug-in comes in handy while helping you make more informed decisions.

Sincerely,
Lan H. Turner, CEO
Gecko Software, Inc.

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