Using seasonality and probabilities to look for a trading opportunity may seem a bit advanced for some retail traders. But knowing that the probabilities are in your favour when you see a technical setup means you can have more conviction when placing a trade.
Weekly Index Analysis
If you were to only trade one thing every year and put the probabilities of success in your favour of winning, what would it be?
Over the last 12 years if you have bought the FTSE100 on the morning of the nearest day to Christmas Eve or even Christmas Eve if it were not on a weekend, and then closed that long position at the London close on the first trading day in January, the chances of you winning were very good. In the last 12 years including 2021, there have been 11 winning trades and only 1 losing trade. And yes, this assumes that the current FTSE100 price action doesn't collapse in the next 2 trading days.
Over the course of the last 42 years, there have been 33 December months that ended in the green for the FTSE100. The average return for the UK's index in December is 2.08% in that time and the compounded return since 1980 for just trading December is 87.16%.
The Christmas holiday period has some of the strongest trading days of the year, which is in part due to the thin volumes, as the data suggests buyers dominate that market at this time of year. Most active managers have closed their desks down for the holiday period as they don't want to get involved in a low liquidity environment, as the spreads widen. Retail traders would do well to use their Christmas bonuses and buy the index during this quiet market and get out before the trading world returns to the markets.
The returns are similar in the US markets but the FTSE100 for some reason has higher probabilities of success. In 2021 the UK FTSE100 is up 4.17% over the last month whereas the Dow Jones Industrial Average, Nasdaq100 and S&P500 are up 3.65%, 0.55% and 2.98% respectively.
It is not always green in the indices during December. Back in 2007, the December returns were only just positive for the FTSE100 but for the S&P500 December finished around -4.50% down. This may have been a warning of what was to come as the unravelling of markets continued with a drop of 50% into the lows of 2009 during the Great Financial Crash. Though in 2019 the S&P500 gave no hint of what would happen in 2020 when the COVID-19 collapse occurred. This event obviously took everyone by surprise.
The S&P500 is currently just off its all-time high printed yesterday and over 300 points higher than the 200-period EMA. Of the 500 companies that make up the US benchmark index, 71% are now trading above their 200-day moving average showing a healthy market.
One market that is still struggling is the US small caps as seen in the Russell 2000. This index has dropped from its highs in November 2000 to trade back into a range it formed between the end of January 2021 and March 2021. The Santa Claus Rally may have helped get the small-caps back above the 200-period moving average, but the lower swing lows and lower significant swing highs are setting up for some bearish momentum unless we see a move above 2280 in the coming days.
The ActivTrader sentiment indicator shows that 81% of traders on the platform are short this market, which for a contrarian trader means that there is an opportunity to go long when the technical analysis offers an entry. As I discussed earlier there is a high probability move to the upside until the first trading day close in January, so going long makes more sense to me.
One thing that happened this week that doesn’t usually happen every year is that Christmas Day and Boxing Day were on a weekend. So, Monday and Tuesday were designated Bank Holidays, and the UK markets were closed. Today is the first day back for the UK traders meant that there was a gap up, because of the strength seen in the US markets from the start of the week. Looking back through an intraday chart of the FTSE100 shows that most gaps do get filled. In the last couple of trading sessions where there was an initial gap, not only did the void get filled but the markets continued to reverse the direction of the gap’s momentum. The moving averages are widening showing momentum is to the upside and usually, momentum leads price action as traders like to buy strength and sell weakness. There is also the fact that the markets are illiquid, and traders tend to buy a thin market. With all of this in mind, I shall be watching to see if there is support around the 20-period and 50-period moving averages, with a rejection of the 7400-support level.