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Tuesday, November 27, 2007

How to Use Seasonal Tendencies: Part I

The other day we discussed the strengths and weaknesses of Seasonal data. Now we'll discuss how to use Seasonal tendencies so that we recognize the strengths, use them, but do not ignore the weaknesses.

One of those weaknesses is that seasonal tendencies change. The markets are not what they were 50 years ago. The same things do not affect them. Therefore, an entire seasonal average may cease to function, and new ones may arise. So the question arises, how can we combat this weakness? Since it takes years for the mathematical averages to allow a new seasonal move to become evident.

Moore Research Center Inc, is a wonderful site that provides data to combat this problem. Here's a free example of one of their charts.

This is a wonderful chart to explore together how to properly use seasonal data.

Notice first of all, that MRCI charts out the 5 year average, and 10 year average. This is extremely helpful to combat our problem of changing seasonal tendencies. By plotting out different averages, we understand if a tendency that shows up on the 30 year average, is a move with a lot of history behind it, but if it is also on the 5 year average, than this demonstrates that the forces that work towards such a move are still in play and relevant. In fact, MRCI often plots out the 30, 15 and 5 year averages. When these averages all point to the same move, then we understand that this is a seasonal move that is still very relevant and possible.

Does this guarantee us the move?

No. If you notice this chart, the seasonal tendency was for the DOW Jones Industrial Average to move higher beginning on November 1st. Does this mean that seasonals hold no value, and again, it's just hit and miss? No. I'll continue tommorow with a discussion in order to understand how to use seasonal tendencies in trading and investing.

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