Trading Seasonality and Cycles
Like almost all markets I have encountered over the years they all exhibit their own behavioural trading tendencies. What do I mean by this? In this instance it’s that markets have really obvious repeatable measurable cycles and patterns that can be taken advantage of. There are some really great trading seasonality and cycles you just want to be part of! Some of these are based on purely supply and demand driven events especially prevalent in the Commodities trading field.
- Grains have a low in harvest time when supply is normally greatest.
- Soybeans due to the harvest bottoms in October.
- Gold quite often bottoms in August and rises based on Far East demand.
- Gasoline bullish for the summer months
Chart 1: Live Cattle Futures example:
What about the Stock Markets? Well they can have their weakest month in September and strongest in December for example (S&P500, FTSE100) or many other peculiarities based around Presidential Cycles or Triple Witching days.
There are so many examples and endless potential trading strategies you could create just like these across all types of asset class.
Some patterns and cycles are extremely hard to determine and understand but they just always appear to happen. Normally the players in these markets will understand the fundamental reasons for this action but you may not. A great way to trade seasonality and cycles is by using Technical Analysis. Using Technical Analysis will also allow you to circumvent this deep knowledge and understanding of the markets you may not be privy to!
Gaining access to the success of the Chinese markets can be quite hard for many reasons. These markets as well exhibit their own behavioural tendencies. Presented here are three ways to take advantage of any perceived strength or weakness in the Chinese economy based off of seasonal cycle patterns.
The Hang Seng Index (HSI):
One of the most accessible markets for those who aren’t native Chinese to trade and one that lets you take a point of view on the performance of the Chinese economy is the Hong Kong Hang Seng Index (HSI). (Closely correlated to the Shanghai Composite Index)
As an example of seasonality i.e. those events that happen regularly/ consistently over repeatable periods of time, the HSI has a high probability of every July going up. (see Chart 2) and quite often the initial run up begins mid-June.
Adding this fundamental bit of information to a technical trading approach for timing then you could quite easily create a strong trading moel.
Chart 2 : Seasonality in the Hang Seng Index – can you spot it?
We are now entering the potential bullish period. Note on chart 2 how a simple CCI indicator (which was developed to help find commodity cycles) could be used for a simple entry / exit tool to aid your trade timing!
Another seasonality example is Gold. One of Gold’s biggest uses is jewellery and both China and India are its biggest consumers.
In the late part of the year – say November through February onwards Gold has historically risen. This is the biggest consumption time in these countries due to festivals, New Year etc.
Again, this is not a sure thing as Gold is a very political commodity and also highly inversely correlated to the US Dollar. it does happen though and should be married up with technical trading for better results. At least you should start to from a bullish consensus. Also as a warning, keep an eye out for Chinese Gold production levels. They’ve been increasing and this can water down the effect as well as other Global economic goings on.
Where do we currently stand with Gold?
Chart 3: Current state of Gold:
Chart 3: Normally a safe haven play and if the US Dollar is weak then worth a look. from the weekly charts strong Fibonacci support at $1150 levels. is this a level for a bounce up or a serious fall lower? Current long term downside target could possibly be $940’s. Seasonally it is a bearish market this time of year and the COT is looking neutral.
Copper – the red metal:
Often thought of as the lifeblood of the Chinese industrialisation process. China consumes greater than 40% of the world’s production! So as you can imagine the price of Copper is heavily correlated to the success of the Chinese economy. Fundamentally this could be measured through the Chinese manufacturing PMI (See Chart 4)
Chart 4: Copper vs Chinese manufacturing PMI:
We’re though interested in Technical Analysis and a common Copper cycle trade is the Chinese New Year effect. Which could explain the bullishness of the metal in the earlier part of the year?
Often buying occurs a couple of weeks before the New Year so watch for this happening. Again timing is crucial for this sort of trade and a weak Chinese economy would negate this effect so setting up your Technical Analysis tools correctly is fundamental to this trade succeeding.
How can you get a piece of the trading action?
well you could trade it from the UK on the LME (the worlds biggest metals market), from the USA on COMEX (CME) or from China on the SFHE (which is harder to do due to trading restrictions in place.)
Currently some interesting traits, market practices to look out for and aid your technical analysis if you fancy taking on some Copper price action:
Currently if the price of Copper falls below 7000 (LME Price), Chinese buyers often come back into the market. We’re currently in that zone so potential bullish opportunities? Price currently 5665 at time of writing. By dividing by 2204 you can get back to the COMEX price (or vice versa)
You must keep an eye on Copper inventories to assess supply and demand. The LME is a good place to monitor this from.
Warning! Chinese figures can be misleading as domestic businesses operate off of letters of credit backed by Copper i.e. they don’t actually need the metal!
Watch out for the Chinese governments 5 year plan which highlights the need for more Copper usage.
Again, keep an eye on supply issues.
Chart 5: Weekly Chart COMEX Copper: Where do we currently stand with Copper?
Copper is currently over-supplied with big warehouse stocks. The COT report data is looking increasingly bearish and support at these prices ($2.5 on COMEX or $5500 on the LME) is mainly relying on a weaker US Dollar.
You can see just from this article that there are and could be many opportunities to trade the ‘China effect’ if you understand the fundamentals and the behavioural bias underlying the markets and team it up with you technical analysis.
Have a look at other holidays, patterns you may be aware of and see if they too can be traded – there are just so many trading seasonality and cycles to be taken advantage of?!