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2. Trading Commodity Seasonal Patterns
Every calendar year there are different seasons. It is how we plan our lives. Weather is the first to come to mind, but there are holidays, sports, shopping and many more that help break up the monotony of our day to day patterns. The commodities market is no different. Just as you use a calendar to plan and differentiate Thanksgiving from Opening Day in baseball, you can use the same calendar to blueprint possibly when wheat futures will be high and copper prices low. Traders can use these seasonal patterns to their advantage because it allows a certain degree of predictability of future price movements, rather than being bombarded by an endless stream of often contradictory market noise. Now of course there are other factors too numerous to list that can affect the futures markets, but certain conditions and events reoccur at annual intervals and help traders anticipate where the market is headed.
Seasonality of Futures
Although not 100% accurate-as any weatherman will tell you-weather is, in fact, the chief contributor to seasonal futures trading. The annual cycle from warm to cold weather and then back again affects all the agricultural commodity markets as their supply and demand coincides with the planting and harvesting seasons. However, the annual weather pattern can stretch its power to all the commodities. For example, demand for heating oil typically rises as cold weather approaches but subsides as inventory is filled and decreases even more as the summer months get closer. The calendar not only gives us climate related seasons, but also the annual passing of important dates that then creates 'seasons' of its own. The due date for filing U.S. income taxes is every April 15th. Monetary liquidity may decline as taxes are paid, but rise as the Federal Reserve recirculates funds.
These annual cycles in supply and demand give rise to the seasonal price phenomena or what we would simply call seasonality. This annual pattern of changing conditions may cause a more or less well-defined annual pattern of price responses. Seasonality, then, may be defined as a market's natural rhythm-an established tendency for prices to move in the same direction around similar time most years.
In a market strongly influenced by annual cycles, seasonal price movement tendencies may become more than just an effect of seasonal cause. It can become so ingrained as to become nearly a fundamental condition in its own right - almost as if the market had a memory of its own. Why? Once consumers, producers, traders, and the like fall into a particular pattern, they tend to rely on it-almost to the point of becoming dependent on it. This dependency can be tricky as such trading patterns do not repeat without fail. The seasonal methodology, as does any other, has its own inherent limitations. For instance, some summers are hotter and dryer than others thus leading to less of a supply than what was predicted for the fall. Even trends of exceptional seasonal consistency are best traded with common sense and caution. A basic familiarity with current seasonality fundamentals and a simple technical indicator will help enhance selectivity and timing of entries and exits.
Seasonal Futures Spread Trading
The Moore Research Center (MRCI) is one of the leaders in assessing these seasons and has evaluated up to 55 years of history against the market behaviour of current contracts. This research has been used, and still is, by major exchanges like the CME, CBOT and others including hedge funds and traders. They are members and regulated by the Commodity Futures Trading Commission (CFTC) as a Commodity Trading Advisor (CTA). MRCI presents a list of fifteen seasonal futures spread trading ideas each month, covering all commodity sectors: grains, energies, currencies, livestock, etc. Every spread they present has shown at least an 80 percent historic reliability over 15 years (when available) and Moore Research provides detailed statistical data for every year the individual spread has been tracked. Their spread trading cycles last anywhere from a week or so up to around 3 months. Most of them average about 4-6 weeks. Each spread has a pre-determined entry and exit date along with a pre-calculated point at which the spread would be exited if it became a loser. Every spread is updated each day on their web site from the day it goes on to the day it comes off and their results are recorded. MRCI uses the daily settlement prices of the market as the values to label their entry and exit prices.
There is no such thing as a sure thing, but ignoring this chronological behaviour of seasonality and the tools readily available to help predict these patterns is a mistake for futures traders. A knowledgeable broker who is MRCI equipped and spread savvy is a keen idea if you want to get into trading seasonal commodities. The more tools you utilize within using the approach of seasonality trading can help you in whatever commodity or commodities you wish to trade.i
Toepke, Jerry. "Moore Research Center, Inc." Why Seasonals Work. McGraw-Hill, 14 May 2009. Web. 05 May 2016. .
* Past results are not necessarily indicative of future results. The risk of loss in futures trading can be substantial, carefully consider the inherent risks of such an investment in light of your financial condition.
** SEASONAL TENDENCIES ARE A COMPOSITE OF SOME OF THE MORE CONSISTENT COMMODITY FUTURES SEASONALS THAT HAVE OCCURRED OVER THE PAST 15 YEARS. THERE ARE USUALLY UNDERLYING FUNDAMENTAL CIRCUMSTANCES THAT OCCUR ANNUALLY THAT TEND TO CAUSE THE FUTURES MARKETS TO REACT IN A SIMILAR DIRECTIONAL MANNER DURING A CERTAIN CALENDAR PERIOD OF THE YEAR. EVEN IF A SEASONAL TENDENCY OCCURS IN THE FUTURE, IT MAY NOT RESULT IN A PROFITABLE TRANSACTION AS FEES, AND THE TIMING OF THE ENTRY AND LIQUIDATION MAY IMPACT ON THE RESULTS. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT HAS IN THE PAST OR WILL IN THE FUTURE ACHIEVE PROFITS UTILIZING THESE STRATEGIES. NO REPRESENTATION IS BEING MADE THAT PRICE PATTERNS WILL RECUR IN THE FUTURE.
FN: Aug Crude Lt(NYM)
LT: Aug 2,5,10 Year Notes Options(CBT)
Aug Bonds Options(CBT)
Aug Canola Options(CBT)
Aug Wheat Options(CBT)
Aug Corn Options(CBT)
Aug Oats Options(CBT)
Aug Rough Rice Options(CBT)
Aug Soybeans,Soymeal,Soyoil Options(CBT)
8:00 AM CDT - Case-Shiller 20-City Index(May)
9:00 AM CDT - Consumer Confidence(Jul)
9:00 AM CDT - New Home Sales(Jun)
LT: Aug Copper Options(CMX)
Aug Gold Options(CMX)
Aug Silver Options(CMX)
Aug Natural Gas Options(NYM)
Aug RBOB & ULSD Options(NYM)
6:00 AM CDT - MBA Mortgage Index
7:30 AM CDT - Durable Orders(Jun)
7:30 AM CDT - Durable Orders Ex-Transportation(Jun)
9:00 AM CDT - Pending Home Sales(Jun)
9:30 AM CDT - API & DOE Energy Stats
1:00 PM CDT - FOMC Rate Decision
2:00 PM CDT - Dairy Products Sales
Disclaimer: This calendar is compiled from
sources believed to be reliable. Moore Research Center, Inc.
assumes no responsibility for any errors or omissions. It is meant
as an alert to events that may affect trading strategies and is not
necessarily complete. The release dates for certain economic
reports may have been rescheduled.
* Please note that the information contained in this letter is intended for clients, prospective clients, and audiences who have a basic understanding, familiarity, and interest in the futures markets.
** The material contained in this letter is of opinion only and does not guarantee any profits. These are risky markets and only risk capital should be used. Past performances are not necessarily indicative of future results.
*** This is not a solicitation of any order to buy or sell, but a current market view provided by Cannon Trading Inc. Any statement of facts herein contained are derived from sources believed to be reliable, but are not guaranteed as to accuracy, nor they purport to be complete. No responsibility is assumed with respect to any such statement or with respect to any expression of opinion herein contained. Readers are urged to exercise their own judgment in trading!
RISK DISCLOSURE: Past results are not necessarily indicative of future results. The risk of loss in futures trading can be substantial, carefully consider the inherent risks of such an investment in light of your financial condition.