After years of trading, you start to see common occurrences around certain times of the year. Some of the patterns can be explained easily but others simply have just become self-fulfilling prophecies. We call these “cyclical patterns”.
Some of the most common patterns are “Sell in May and Go Away”, and of course the “Santa Claus Rally”.
These patterns can present great trading opportunities. The difficult part can be the timing, as the move will almost always start at slightly different times each year. Also, the intensity of the move can differ largely. If it is a volatile year you can get huge movement, whilst other less volatile years can mean trading it is not worthwhile.
Large fundamental events can get in the way of these patterns some years, so always wait for a clear signal.
It is equally important to consider a strategy that can help you improve your probability of success. Your strategy needs to include what product you will use to trade, when to get into the trade, and when to exit.
Below is a chart of the XJO overlayed on itself over the past six years. The movements are represented in percentage terms. E.g. 105 is equal to a 5% move since the start of the year.
One observation is that the market, more years than not, moves higher into April and falls during May into June. Notice though, that the move up starts at different times every year which is why timing it correctly can be vital.
If the market falls into February, you can expect a strong move higher come the reporting season in mid-February. Otherwise, a strong January will generally see a sideways move in Feb and a grind higher into late April.
“Sell in May and Go Away”
This is one of the more common patterns which most investors know. Most years in May our market will either fall strongly or go sideways.
Of the past seven years, only two Mays saw a gain, and the gains were only around 1.4%. Of all the falls the average was over 3%.
A great Options trade for early May is a Bear Call with the strikes above the market. This strategy can profit from both bearish and sidewards movement.
July – August Reporting
After the end of the Financial year, the market will tend to start its recovery and rise into September. This is due to a combination of the U.S reporting in July and Australian reporting in August. The intensity of the move up can, in part, depend on how strong the reporting season is.
But you can see from the above chart only one year saw a fall from July to the end of August.
Santa Claus Rally.
Santa comes with gifts, well at least for the past six years. Every December has closed off higher to finish the year with a bang. The average bull moves for the past six Decembers was 2.12%. This is a great time to set a bullish trade – especially if you see a fall through November.
There are numerous other seasonal and cyclical patterns that can be observed and traded on our market. Derivatives give you the best flexibility to be able to trade these patterns, with several strategies that can be adopted to trade the market up, down, or sideways.
We use a combination of ETOs and Mini Warrants as a strategy that complements each other. Options provide access to strategies both in the reporting season and when the market goes sideways. Whereas, Minis are a great way to trade a directional view, having an embedded stop loss feature.
Using a combination of Options and Mini Warrants gives access to over 200 shares, indices locally and offshore, and a selection of commodities, all traded through the ASX. This is important to have peace of mind that your trading bank is safe, and the other side of your trade is guaranteed once filled.
If you are looking to learn to trade, you need:
- A set of rules to help you enter and exit the market whilst controlling your risk and keeping your own psychology out of the way.
- Choose which market you want to focus on.
- What instrument/s you will use.
- An advisor to run your ideas past and help you with transacting.
- A Broker, either Full Service or Online that you trust.
We provide both education services and Broking services to clients of all levels whether beginner or experienced. If you would like to learn more, call us on 03 80805788 or fill out the form at the bottom of the page.