How do you use seasonal charts for short term trading, or for long term investing? If you trade options, can you use them, too?
If you are interested in technical analysis for short term trading, or fundamental analysis for long term investment, the following twelve month example will run you through various trades (long or short), options plays, and long term position investments over that one year period to illustrate how to use them.
Every month we compute new seasonal charts for all the stocks in the Dow Jones Industrial average, S&P100 Index and Nasdaq100 index.
If our most recent forecasting accuracy has been good enough (you'll see it in the upper right hand corner of the chart), we'll show the stock chart in the newsletter. If not, we don't advise you to trade it and keep it out of the newsletter so as not to confuse people.
Sometimes the stock seems to be trading as it has historically done under a similar past economic environment, and those charts, called "Factor Seasonal charts," are the apex of seasonality analysis. They are revealed in our newsletter along with the price charts you are about to see. However, in this twelve month trading log, for Verizon, we're going to skip the Factor Seasonals to make the story even simpler.
The big thing we want to communicate is the many different trading styles that can use the accuracy of these charts for trading, and how they often keep you out of bad trading periods. Nothing else can do that. They're not always right but their accuracy can be astounding ... hopefully enough to match with your trading or investment style, so you'll have to see for yourself.
Watch each month in this series and read how the seasonal charts show you what to expect and therefore suggest what you can do for trading a stock in the subsequent month. Or, they can tell you when the probable high or low for the year is for position investors and value traders.
Just look at the charts. Each one is made right before the coming trading month, and the yellow line shows the current price history so you can keep track of where you are ...
With this chart, you'd expect to be buying a Verizon low sometime in mid-August because the orange and green lines agree. Since the forecasting accuracy is currently only 61%, you might want to execute a bull put spread underneath the low to collect premium as a more conservative play, but to start this off let's say you want to buy Verizon because it's a recession and you want the dividend yield, so you want to buy it on a dip.
Obviously you could have done that in March and May using these charts, and gotten the lows, but we want to start with a one year trading log to show you just one example of how to use these charts month after month. So we have to get in the stock to say we got in. There are times when someone tells you there's a good stock to buy and you rush in, but we always wait for a seasonal projected pullback. So while we didn't get in at the very lowest price for the rest of the year, we got in at one of the most logical places, which happened as predicted, and it did turn out to be not the lowest price for the remainder of the year but one of the lowest ... so great!
Remember that this is just one sample stock, and there are countless other examples we could have chosen. It's not a clean perfect example (so the method is not a perfect forecaster all the time) because we didn't cherry pick it. We just randomly chose a Dow Jones stock to show you how you could use the Factor Seasonal stock charts with lots of investment and trading strategies (including options) to set expectations, execution dates and (hopefully for you) make money ...
Great - in the following chart you'll see that the stock indeed made a low in August exactly as expected time wise, and it's formed a base so far that hasn't been broken.
Don't enter any new trades in September because the orange and green lines head in opposite directions, which normally means stay out of new positions since there's a conflict of expectations between the currently best seasonal price projection and the traditional historic seasonal projection. We always want those two to align for the safest trades. It's all about safe trades to make money, not excitement.
Oops - the stock went down in price during October. That's what happens when the orange and green lines don't align -- the stock price is not predictable. However the covered call strategy during that time made money (a conservative strategy when there's price uncertainty like that) but your outright stock purchase is at a loss. If you got in earlier during the year you're still at a profit but if you got in during August you're now in net negative territory for your shares.
The following chart is what happened in October, and what you'll do for November.
You didn't initiate any new trades for October because of the 43% forecasting accuracy last month which told you to skip the stock, and because the forecast was so darn volatile with orange and green lines conflicting in slope. But now the forecasting accuracy is back up to 86%.
Will you write calls at the beginning of the month or write puts/buy stock near the end of the month as the orange line suggests? There's not a lot of time for that strategy to play out, but the forecasted price drop is deep, so it might attract options players who want to collect premium. If you wanted to buy puts, we only suggest that with LARGE steep declines that last over one to two months in length, and that's not the case here. Many other articles illustrate that strategy, but heck, this is Verizon so what do you expect?
Up to you what to do ...
Most anything you did tradewise expecting a drop during November lost money. The seasonal chart made a wrong forecast in that Verizon went straight up. Moral: don't try to trade a trend that is projected to last just a few days. It's not worth it. Trade something else as there's plenty of shares in the newsletter.
That being the case, you probably did nothing during the month -- no shorting, no bear call spreads, and you didn't buy at the projected low because it didn't make a bottom. Net result? You lost nothing because you used logic on top of the charts.
Remember, when the projected seasonal move is so tiny in price or time, don't trade it. Go for large trades and long trades to maximize your chances of success. That's how to use the charts. They don't always have to be right, you just have to know when to use them and when to ignore them and you can always find several that look good.
For December you didn't do anything because the forecasting accuracy was low (60% in the upper right corner of the chart with the red arrow pointing to it) and the green and orange lines have opposite slopes.
However, there was an expectation -- it would probably have followed the green or the orange line pattern. If green, then December would be the year's high, which happened. If the orange, then back down we would expect to come again all the way through January at least.
In fact, if we make a new high in December then you are expecting a market turn and Verizon to drop going into January (just use the January forecast at the far left of the chart when December comes because that is the January forecast for 2010, too).
So with this next chart that has December prices, you are expecting to sell the stock, short it, buy puts, sell calls, or execute a bear call spread strategy to collect premium ... whatever is your trading or investment style. The charts align, the pattern suggests it, the forecasting accuracy is back to 91%, so you might do something if you get a MACD sell signal or trend line break or other trigger...unless there were even better trade set-ups elsewhere. After all, who said you had to trade this stock? I'm forcing the issue a bit just to show you how to use the charts.
In any case, never just trade the seasonal expectation, always confirm it through some trend following price triggering mechanism first before you risk your money.
Yes, we made money shorting the stock or selling calls or just locking in our profits by getting out. The blip projected in February is so small in time and price that it's not worth it even though forecasting accuracy is above our minimum threshold of 70% that we like to see.
Alright, with March coming up we're expecting to buy Verizon at a bottom, perhaps the low for the year if we are lucky.
Nope, we missed it. The low was in February. The MACD would have turned up earlier but we were waiting for another low so we missed the buy signal.
However, if you absolutely HAD to get in during March for your portfolio, knowing that the period for the seasonal low had passed and there wasn't one for March, you immediately realize it was in February and pile in if you must. But that's only for a portfolio manager who HAS to be in the stock and was waiting ...
Sorry, most times the charts catch the seasonal low but in this case it didn't. See how to pick tops and bottoms for many real time examples where it did. You don't have to be perfect, you just need a tool that helps you make money. So far this passes that test ... and on a randomly picked stock.
Looking at the April chart, it's just too steep/volatile to do anything. At best I might risk a bull put strategy in mid-April if the price makes the bottom, but since prices are supposed to go up and collapse right after that all within the space of a month, even that strategy is fraught with more than its usual risk. So stay out. Why trade? Go through the chart book and look for something else.
The forecast from May is more downward price action, and then an abrupt jump (this type of picture usually means upside gaps) near the end of the month. That being the case, the fastest way to trade this, since it's like a V-bottom, is with a trendline break rather than MACD or Fisher transform indicator since the trendline tends to be faster as an entry.
If the bottom was rounded, or a projected top had a rounded slope, you'd tend to use a slow MACD to confirm the price trend change as the trigger to enter a trade.
So last month, June, we set up a trendline and might but some stock, calls, or sell puts (bull credit spread strategy) for a short pop upwards expectation. Because the trend upwards is only projected to last a very short time, you have to be nimble to do this.
Did it work? Yep, but who knows if you made money. We can only say a bull credit spread definitely made money but the profitability of other strategies would have depended on your execution. Too close for my taste but I'm just illustrating how predictive these newsletter charts are.
Actually you'd want to be trading larger and longer trends, as many of the other articles illustrate, but this is a trading log for Verizon so whatever comes we're forcing ourselves to act and create a trade as part of the teaching mechanism. Let that sink in: many of these trades we wouldn't take, even though most are working and the forecasts are right, because there are far better trades in the newsletter for other stocks.
In real life you'd have to decide if you'd use the strategy we discuss and if not, skip to the next stop which looks far more promising. We're just illustrating the principles of seasonal charts with this trader's log.
The stock is now heading down to what appears to be the low for the year -- notice that the seasonal low for Verizon, because of our adaptive predictive algorithms, is projected at a different time than for last year -- so a position trader/investor would get in on any type of MACD, Fisher transform or trend line break that would indicate a low for the month.
Sure enough, whether you got in early with the MACD signal, or later (which turned out to be a secondary higher low), you did see a low for the year, as predicted (aren't our adaptive factor seasonals great -- what other technique could have predicted this?) and both entry points are profitable for the month. All strategies that used this forecast made money.
With the Factor Seasonal forecasts, sometimes you get in and sometimes not. Some months you stay out entirely, and others there's a trend expectation but no signal.
Don't sweat it ... you'd be trading something else that month.
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