I have been doing seasonal and cycle research for many years. There are many kinds of seasonal and cycles present in a large variety of markets that provide incredible profit opportunities for traders who pay attention to them. In fact, some of the very best and most successful traders in the world use seasonal and cycles patterns to choose their best trades.

One such trader is Kurt Sakaeda. I do not know Kurt, but I do know he has consistently won trading championships in the Robbin’s World Cup by using simple seasonal models. He has, as I recall, returned over 900% in some years using seasonals in the championship. When I see a trader is truly successful using a particular strategy, I quickly abandon all the trading books out there written by those who don’t even have a trading record, and try to discern what the best bias is in that arena.

I first learned of seasonal trading twelve or thirteen years ago from Murray Ruggiero. He had developed a “Universal Seasonal” program I spent a lot of time with. He also wrote of various seasonals and cycle trading in his book, Cybernetic Trading Strategies. I then began running all kinds of seasonal and cycle studies and much research which culminated in my becoming a CTA. I was so successful trading these cycles and seasonals that I quickly became the largest Emini S&P trader in the world. I later retired as a CTA, but my research lives on and a good deal of the fruits of my labor can be benefitted from at EminiForecaster.com.

One of my best choices when dealing with software that enables me to compute seasonal is a simple piece of code I wrote for Tradestation.

There is software available out there that costs $5000 that will basically do what I am about to give you here for free. This company that sells this has an aggressive marketing program that is very convincing. An investment manager with over $100 million under management called my office yesterday and asked me about this software. He told me about an online demonstration they presented him with and described their $5000 program.

I told him his mentioning this was very coincidental because we were currently developing a software program that would be the culmination of over ten years of seasonal and cycle research. I further told him that our software would do what theirs did and a whole lot more. In fact, it will be the most powerful seasonal and cycle program ever written. And, it will sell for a fraction of the price of what might otherwise be your best choice. He told me he’d be our first customer about three times before we got off the phone ;-)

While the seasonal program is in development, here is a free piece of TradeStation code that can help you to achieve much the same thing as other seasonal programs.

TRADESTATION CODE: If you have TradeStation, download the code from this link: http://eminiforecaster.com/SEASONALARTICLE.ELD

If you do not have TradeStation, you can view the code in this text document: http://eminiforecaster.com/seasonalcode.txt

By using the maximum adverse excursion report in TS, this piece of code will tell you,from any given trade day of year, or option expiration what your probabilities are.

Further, it can be set for any number of hold days for other secondary expirations. The BSe variable (see the code) is for long/Short, Mnthe gives you for any given month from expiration to expiration, TrdDayofYear gives you result for given trade day of year.

TrdDayofYear, if zero, it will set mode to expiration based entries. The current TDOY is printed to the print log. If Holde, is zero it will set exit to next3rdFriday expiration.

Stp, which is based on percent move from entry can also be used.

Once set up, you can view the max adverse excursion graph to determine best strike price to do credit spreads from, buy or sell or virtually any straight seasonal strategy.

By using the code provided, you can enter any of the variables to test the seasonal of your choice. It was mentioned to me that Apple Computer was a best choice for October, so let’s look at AAPL.

Let’s just do a simple seasonal for Apple stock in October for the last 10 years of data. October 1st corresponds to the 189th trading day of the year right now, so I input 189 into the variable TrdDayofYear and I want to hold for a month, so I simply enter 20 into the holde variable to hold for 20 trading days.

Above, we see what my screen looks like in TradeStation. Then what we do is open the TradeStation Performance Summary and use the Maximum Adverse Excursion Percent tool on the Trade Graph tab. Sounds like a big name? Don’t worry about it, I will tell you what you are looking at in a minute. Here’s what the report looks like.

Above we can see that the results for all the October trades over the last nine-ten years. On the vertical axis, it shows the final result for profit and loss. There were 9 trades total (this year hasn’t closed yet). One was a loser (the red one). The maximum draw down that occurred for any winning trade was around 11%. So there were 89% winners. 6 out of 9 of them were over 10% winners. One was a loser and lost around 28%. The nice thing is, once you get accustomed to this format, you can interpret the entire seasonal on a quick glance.

I simply leave the performance graph open and change the two inputs we used above to get, or hone in on any seasonal I want. The results are instantly displayed on the graph above. It is simply awesome!

You could get more complete stats by using the Tradestation Performance reports. These are excellent and much more extensive than other software you can currently buy for this purpose.

By the way, this TradeStation code we have given you above has a lot of other functionality you can use, but this will be all we will be able to cover in this article.

You could also use the Tradestation optimizer to adapt this program slightly to find the “best choice” for entry and exit dates for this seasonal using this software. That also is beyond the scope of this article. Either way, you can do this for a lot less than $5000. Perhaps your real best choice for software is this crude and simple free TradeStation code.

You can use this free TradeStation code I have given you above while you wait for the release of our ultimate cycle and seasonal program that will be released in the near future (it has capabilities way beyond anything any currently available software could even begin to do).

If you want to be notified about the release, simply go to www.Eminiforecaster.com and put your email in just above the “Let me see it” button on the home page and opt-in. We will notify you when the release is. My working title for the Software is “Cycle Vision”, so if you have questions or ideas about it, use that name in your email so we know you are talking about the new software.

Here’s the best part! If you decide to get TradeStation to try this out, tell them I sent you (EminiForecaster.com) and they will deposit a complimentary $50 in your account. This is our way of saying thanks for being part of the success of our company.

By the way, this $50 is just enough to do a trial to the EminiForecaster.com service if you aren’t already using it, so it is like getting a free trial to the service.

While the congress rejected the bail out bill (barely), they did not, however, pass a bill that states that there would be no more proposition to bail out the investment banks, ie - Wall Street.

A likely scenario is that they will keep the PPT (plunge protection team) on a leash and let the market slide a bit more like it did Monday on the news of no passing of the bill.

Once the dire predictions from the establishment are realized, the congress will cave in and since there are now less pressure from the public (after losing another 10-15% of their nest egg) - they will pass this “Trillion-Dollar-Baby” like it was a walk in a park.

Is the “October Surprise” DOW declining by 1,000 points? We shall see.

No matter what the congress does it is not good for an average American - would you rather add 10% additional percent to the national debt and therefore probably devalue dollar a bit more or lose 10-15% of your 401(k), IRA, etc.?

HOW ABOUT BOTH?! Not a pleasant but a likely scenario.

When I talked to Rob the other day on his thoughts about the new “new deal” he mentioned how S&P500 was at 800 at the end of 2002 recession and we didn’t have the problems we are facing today.

Considering the market is currently at 1,200 ish - you do the math on how much more room we’ve got on the downside - 35%+!!!

I have been preaching for almost 2 years now to get supply of gold, silver and stored food - cheap insurance considering the circumstances.

Much has been written about various cycles in the stock market, other commodities and investments.

One very famous example is the Delta Phenomenon, a trading book that sold huge quantities at $175 per copy (and some for many many times that). The basic idea has to do with lunar cycles.

Lunar cycles? Stock market? About now, I can hear you saying, “what a bunch of #^$%.”, but bear with me because, if you are of the hard core left brained approach to such things, I would like to point out that even the Atlanta Federal Reserve has published a white paper on the geomagnetic influences on stock market cycles (http://www.frbatlanta.org/invoke.cfm?objectid=AFD46B63-2852-4812-BE83E6D0C777F4BF&method=display).

I have done a tremendous amount of research in this area, devoting several years of my life to this very topic. Much new research in astrophysics is revealing we really live in a very electric universe (http://www.thunderbolts.info/home.htm). I have been able to achieve winning percentages in the 90% range on longer time frames using geomagnetic data to time the stock market. So, don’t knock it til you try it ;-)

Modern world culture has largely abandoned the use of what our forefathers commonly used, and that is the lunar calendar. Many ancient cultures, such as the Chinese or those of the Jewish faith, for example, still retain this tradition. Many Buddhist traditions carry certain days of the lunar month as having certain significance. This is also true in Indian writings such as the Vedas.

Is there some wisdom to counting out events according to lunar cycles instead of only solar ones as we do here in the west? Does reliance on a purely solar calendar hide things from us that would otherwise be obvious on another interval? I certainly think it does. After all, the moon, for example, surely influences fluid flow, and we are largely made, of water. The moon and sun also significantly influence charges on the ionosphere that impact our environment. So, these things all tie together. As mentioned, physics is now coming to find more detailed reasons to believe electromagnetism and gravity are really opposite sides of the same coin. For more on this, you might enjoy the articles of Myles Mathis at http://www.milesmathis.com/

There are many physical cycles we could analyze that influence human behavior as it relates to the stock market. As an exercise, let’s see if we can find any truth to stock market cycles that are based around the lunar month (from new moon to new moon). There are many such cycles we could analyze, but this one will suffice to show some interesting cycles and, how one might go about discovering them. Then, you can write me to tell me what you have found;-)

To start with, in trying to find the data to do these tests, I quickly found there was no commercially available software that could export any reasonable amount of data. So I developed my own. I call it the “Astro Data Generator.” It will generate any data you need for just about any planetary body in the solar system (ie. Declination , longitude, speed and distance etc.).

The new moon is simply an event that occurs when the sun and the moon rise at the same time. So I export data for the sun and moon and use my spreadsheet to identify when they cross. Then, from that point, I will count forward, buying and selling the S&P 500 (the best example of the tradable US stock market as a whole) at each point (daily) in the cycle. Here is what I found:

As can be seen in the above table, there is an excellent bias around purchasing the 23^rd or 24^th day of the lunar month and holding into the 4^th day of the lunar month. We can also see a bias as follows:

5th-14th short, 15-17 long and 18-21 short.

As you can see, there are clearly cycles present here. In fact, this particular end of month buying and carrying over into the new month bias is well known on a calendar basis. However, I have never seen a study done identifying an end of lunar month pattern like we have done here. It is a unique study. It is often reasoned that this solar calendar effect is due to “window dressing” by fund managers to make their portfolios look better. Seeing this lunar bias makes me wonder whether it is in fact something altogether different. To get to the bottom of it would require more research that is beyond the scope of this article.

This is certainly not trading advice at this point. For example, to turn this into a tradable pattern, I would do some statistical analysis to see the distribution of trades. Either way, it tells us that much more about human behavioral (stock market) cycles that, could themselves be driven by external forces that are cyclical themselves.

Research in the area of stock market cycles that are driven by other external phenomena is a very fruitful area of research that can lead to substantial benefit. Hopefully the future will bring more thoughtful minds into this arena.

http://finance.yahoo.com/q?s=wm

It was announced today, after-hours, that the FDIC is taking control of Washington Mutual (WM) and selling its deposits as well a number of branches to JP Morgan for $1.9 billion.

Losing $6.3 billion in the last three quarters and getting cut to “junk” status didn’t give WM many options to choose from. $19 billion in losses is projected through 2011, but some say the number could be as high as $30 billion.

Currently, WM has approximately $309.7 billion in assets, $227 billion in real estate loans and $181.9 billion in customer deposits. Additionally, there are 2,239 branches and 43,198 employees who work at WM. This acquisition now makes JP Morgan nearly similar in size with Citigroup.

We should see an Indymac-related type of run tomorrow at Washington Mutual retail banking centers. If I had money at WaMu, that’s what I would do, 6:00AM, just to get in line first.

On September 1st, few knew that AIG, the largest insurance company in the world with over $1 trillion in assets, was in deep trouble. By September 12th, the rumors about major trouble were everywhere. By September 15th AIG’s corporate life expectancy was being measured in days, and the question was: bankruptcy, buyer or bailout? By the evening of September 16th, the federal government had massively intervened, making an $85 billion loan to AIG in exchange for a controlling 79.9% equity share of the company.

Welcome to the brave new world of credit derivatives driven collapses. A world that is far more dangerous than the world of subprime mortgage derivatives. A complex world that because of its sheer size can potentially cause more damage in a matter of days than the subprime mortgage derivatives caused in their first year in the headlines. The chart below shows the relative size of the credit derivatives and subprime mortgage markets.

It never ceases to amaze me how people put strange verbal terms to things that would otherwise be extremely painful.  Let’s take the trading term “Drawdown” for example.  What on earth is that supposed to mean?  I can tell you this.  When I lose money, I lost money.  It is just that simple.

You can call it anything you want, but somehow, calling it “drawdown” seems to make it all better again.  Yes, “drawdown” is a forward looking term and those of you who know me, know I approve of future thinking.  It is always the question, what is developing now, that makes the future likely to be as anticipated that makes all the difference in my trading.

If I am trading a trading system I developed, my first thought on parameter selection is what is the market condition likely to be in the near future?  Will it be more volatile?  Will it be choppy?  It is this kind of thinking that helps me to decide which systems I am going to be trading tomorrow and with which parameters.

I will run tests that show me how the parameters shift under various circumstances and I will anticipate this.  It is this kind of thinking that has made a huge difference for me; anticipatory thought.

But the term “drawdown” also carries with it, without regard to your method or its viability, the seemingly all saving idea that you will recover from where you are.  After all, it is just a drawdown.  Well, if it went down, it certainly will in all likelihood go back up, right?  After all, the great master did say, as you believe, so shall it be done.

So is “Drawdown” really a dangerous word to be using?   Yes, I believe it is.  Because it ignores that larger picture of what really is an efficacious approach to trading.  I think it is a conspiracy against newbie traders to keep them from realizing the big picture of money management.

If you really want to get real about it, go read this techno babble that detaches it even more from the experience (http://www.en.wikipedia.org/wiki/Drawdown_(economics)) of losing real money.  After getting your PhD in detached financial verbosity, you might be able to get a job teaching trading to a bunch of unsuspecting students to try to pay back all the money you lost trading in the real world ;-)

Traders have to deal with reality every day. If not winning, then you certainly are losing. It is just that simple!  Trading is the most basic game in the world, but it requires a solid understanding of oneself and the environment around you.  Challenge the terms that are being presented to you and the environment you operate in as a trader and free yourself from biases that can keep you down.

I have heard people refer to the market being “overbought” or “oversold” for as long as I have been a student of the markets. To be sure, only one of the two terms has any credibility and that is oversold. There is one case for this, and that is when the market is trading at zero. That is oversold! It is the only real case. Since the market (S&P 500) is trading at 1250 as I write this, I guess that isn’t likely to occur today (or at any time in the near future for that matter).

Unfortunately, for those who wish to use the term “overbought”, it is important to note that the market has unlimited upside potential. So this case can never really occur. So there is no such thing as overbought at all.

I suppose people mean some kind of relative term when they speak in this way. In this manner, “overbought” translates to the market is high (higher than it was before). “Oversold” would translate to mean it is lower than it was before. Since the market alternates in a range a huge percentage of the time, one would conclude that such terms are even more un- meaningful than would otherwise have been the case.

Let’s look at it from the other side of the coin. For 1990-2000 the market remained overbought for a period of about ten years. I suppose there were occurrences within the minutia that could have been relatively higher or lower compared to the past, but what is the use of a term that draws your attention to the obvious.

That’s why I decided to coin a couple new terms, to put a new perspective on the whole thing. This is really quite exciting. A revolutionary new concept. My new terms (and feel free to use them widely to get the buzz going) are “Underbought” and “Undersold”.

Yes, I know, undersold is already in use. Well, not in this proprietary sense in which I intend its important new meaning. You see, “undersold” is the opposite of “underbought.”

So what is this “Underbought?” Quite simply, it is when the market has not raised enough to be where it will be in the future. This means “undersold” occurs when the market has not declined enough to be where it will be at in the future. So these important key terms carry a whole different kind of meaning to their (rather meaningless) counterparts “overbought” and “oversold.”

You see, “overbought” and “oversold” look at the past to decide where you are now. But underbought and undersold, look to the future to tell you where you ought to be. This is a huge difference! This is especially true since it is only the future price (with respect to where we are now, or have entered the market) that has any meaningful value to us at all!

I want to start a movement of future looking market participants that don’t dwell on the past. Let’s get over it and move on. The fact is the most successful investors in the world are forward looking market participants. They trade developing trends in the markets. They are anticipatory investors.

This means that most people who are not successful in the markets spend their time oriented to the past. Conducting “backtests” of data to see how the future will be. Ouch.
So I vow today to never say “overbought” or “oversold” again and give myself to the infinite future that stands before me. Its “underbought” and “undersold” from here on out baby!

Please join me in the revolution to make these important new trading terms a solid reality!

The market gapped up around 3% this morning on news of a US government mortgage bailout.  The way they release these things from behind closed doors on a Sunday night assures me the democratic process of our government is all and well (just as it was with Bear Sterns).

Personally, I do not believe the taxpayers should have to pay for the failed conduct of a few very rich guys (who will probably walk away that way too).  All that aside, how do we trade gargantuan gaps and how do we trade our cycle when we are already at an anticipated key level high for the week? There is one answer; very cautiously.

As I write this (Monday 9/9/2008 shortly after the open) I see that NYSE advancers beat decliners by a staggering 19:1.  This is the strongest breadth reading I believe I have ever seen.  This typically suggests a dramatic change in the mood of the markets.  Of course it will need to settle down a bit first, before continuing.  With that in mind, it is important to watch your risk exposure.  Wild swings are likely to occur as those with short term profits, take it, those who are short run scared, those trading on the bigger time frame jump in on the opportunity.

What typically happens in these cases, is the magnitude of the change is so large and occurred so fast, the majority will be afraid to short into it and longer term buyers will be reluctant to sell.

With that in mind, we do still expect the market to (continue to) follow our forecast this week, but, if you are not already in, take your time and find an area to enter that meets your risk reward needs.

Much of the work we do is based around analyzing cycles in the market.  There are various ways to do this.  Fourier transforms, trigonometric regression, Hurst channels and pivot projections  to name a few.  Cycles in the stock market can also come under different names, such as “seasonal”, or “seasonal trading”.  A seasonal is just another form of a cycle, but seasonal are date dependent functions and cycles are often date independent.

There are cycles on all different time frames.  For example, if I make a composite of the market over any different unit of time, it may reveal to me various seasonal tendencies during that interval that have occurred in the past.  Many of the most successful traders in the world use this kind of method.

To make a composite on an annual basis for example, we would start on Jan 1^st (or the first trading day of the year) and, in the simplest scheme, sum all the various years together into one value for each calendar day of the year.  For the last 20 years, it would look something like a low of the year at or around October 17^th and a high of the year at or around Jun 17th.  This seasonal tendency can actually be detected (plus or minus) going back as far as we have data on the stock market.

Armed with this information, one could buy October 17^th and sell (or sell short) June 17^th each year. Historically, this would have been very profitable.

Some years this seasonal does better than others.  I have developed some amazing trading systems off this one basic principle.  For many people though, trading off this cycle is just too long term.  In the years you are wrong, it can hurt.  Some form of risk management is required to make it more palatable.  One way to do this is to trade off a weekly time frame in order to manage risk a bit better.  That gives us approximately 52 segments in a year in which we manage our risk.

There are other amazing seasonals that occur in a shorter intervals that match this weekly time frame.  One such cycle is holiday seasonals.  We are approaching the Labor Day holiday this coming weekend.  Let’s take a look.

Here is a chart showing last year’s price action (the candle stick chart) with the current price action mapped on to it going into the holiday (green line).

This weekly analysis is mapping on to the historical past with remarkable accuracy.

This type of analysis is consistent with one of the many cycle analysis methods mentioned above and is also consistent with some of the techniques we use at EminiForecaster.com to generate our accurate weekly forecasts.

Just how accurate is it to pick a weekly low with such accuracy?  There are approximately 40, 10 minute bars in a day and just over 200, 10 minute bars in a week.  Picking a low within 200 minutes, or 20 bars then is an accuracy of about 90%.

When the seasonal is following as it was earlier in the week, it confirms the seasonal is in effect.  We can run various correlation studies to deal with this problem mathematically that feed the correlation back into the input of the computer model that successively approximates which seasonal (or cycle) we choose to trade.