Transcription
Hello and welcome to Navigating Seasonal Cycles with Jake Bernstein. The information provided in this episode is for educational purposes only. There is a risk of loss in all trading and investing. The results shown are hypothetical and should [music] not be construed as investment advice. And now over to you Jake.
Greeting fellow traders and foundation members. This is Jake Bernstein and today's date is the 16th of December and I give the opportunity to speak to the foundation or to anyone who wants to listen to my recording. I appreciate that. My goal to educate and inform. I do the best I can because I believe education is very important. If you've been in the trading community for a long time, you know that tools are very difficult to come by, especially those that are reliable and consistent. I could teach you many things, but I would rather teach you a few things well than many poor than many things poorly.
If you've been a student of the Confucian analcts, the saying supposedly attributed to Confucious 13.19, or is it 13.39? I think it's 13.39 is very clear. It says teachers shouldn't be gatekeepers. What does it mean? It means simply this. Although I want to teach you many things and keep the gates wide open. It's very important to focus and look specifically at exact situations so that you learn from them as rinse, wash and repeat and so forth.
So what I'm going to share with you is knowledge that I've seen from the inside and from the outside. Fortunately, I've been involved in the professional side of trading for a long time, but I've also been involved as an individual trader when I started and I learned many lessons in each one of those persona. The good news about being a professional is you see how things really work. You really get to understand them well. The bad news is you get to feel bad for those who don't understand things well and who contribute their cash and hard-earned money to a losing cause because they don't have the proper tools.
When I attend meetings with members that are very dedicated to cycles and seasonality, sometimes I come away with a WTF moment, and you all know what WTF stands for. I sit at meetings with academics and I hear one of them say, "Did you know there's a low due in the 392 year cycle?" I say to myself, 392 years or 496 years or 947 years, what's the difference? If that cycle is off by 1%, it's too late. So, I'm not an academic. I'm mostly a pragmatic trader. I want to share with you some pragmatic tools. Hopefully, you will learn these tools well and they will serve you well as they have served me. So, let's begin.
One of the things that I've been showing is seasonality. As you well know, seasonality is a form of cycles. There are cycles and seasonals and seasonals and cycles. And you can analyze cycles and seasonals down to the nth degree. But eventually you get to a point where they lose their pragmatic value. I'm a pragmatist. I'm a realist. I want to use cycles and seasonals in the most realistic way possible. An example, we know that the Japanese yen versus the US dollar has had a very regular cycle of about 7 to 8 years and is due now. In fact, it was due a year ago. We take that cycle and we combine it with timing to give us a trigger and zero in more closely on the event so that we can make the most amount of money with the least amount of pain.
Similarly, [snorts] to a more reductionist level, we look at seasonals. This chart I've shown before in many of my webinars and seminars is the seasonal chart of Alcoa. I'd like to explain it to you and show you what it says and what it's doing now. Because it's one thing to deal with expectation and theory, but reality is a whole another thing. I want to show you the reality of this pattern. But first, let's talk about what this is. You will recognize this as a seasonal composite chart. What I've done here mathematically and believe me I'm no great mathematician. I've taken each year of Alcoa stock and I've done a conversion. I've taken the high of each year and converted it to 100. I've taken the low of each year, the actual price low and converted it to zero. So what I actually have here is a normalized chart in which I've removed the trend or as I prefer to say I'm showing the actual market DNA. [snorts] This is what Alcoa stock looks like without specifics in terms of the individual year. As you can see, we're covering a vast number of years. And what we come away with is the very right hand side of this chart which shows that in the middle of November approximately the 17th and you notice I'm not saying exactly I'm saying approximately through the end of the year has historically been a period of upside movements. This is the ideal situation. But in addition to the direction of the move which is up, we can also tell [snorts] the average average size of the move. In other words, has it been a large move? Has it been a small move? Has it been a medium-siz move compared to the rest of the chart? Looking at the chart, it's very easy to see without being a mathematician that the biggest move of the year is to the upside. And the biggest move to the year is to the upside beginning in mid November and ending in December.
The question that's most important to me as a trader or as an investor or as a forecaster is this. Will it happen this year? Is it just an artifact of the data? And if it's going to happen this year, are there any clues that will improve our probability of success? Is there any way of knowing that it's more likely to occur this year than it did last year? And so forth. Indeed, we could become reductionists and analyze every single aspect of the data if we wanted to to the nth degree, but I don't think that would serve us well. Another thing we could do is ask the question, why? Why does it happen? To me, [snorts] the reason why is a waste of time. I'm not interested in why things happen. I'm interested in that things happen and that we know about those things before they happen so that we can determine when and where and what to do about them. I'm not saying that not I'm not saying that knowing the fundamentals will not help you. What I'm saying is many times these moves begin and end not on fundamentals that are known at the time, but many times the fundamentals are known after the fact, which doesn't help.
So looking at this chart again, what does it say? Expect Alcoa to go higher beginning mid November until the end of the year. The question is, did it happen? Is it happening right now? In order to get the answer to that question, we're going to go to the next slide. And please excuse my voice. You're listening to the voice of an old man. So listen to the quality of the presentation, not the quality of the voice. Let's go to the next slide.
In the next slide, I can further my search. I can go to a search engine, seasonal search engine, and ask the question in November and December for Alcoa stock. Has there been anything that's been accurate 75% of the time with a 9% risk and a duration of 45 days or less? In other words, I'm trying to zero in on what I'm showing you here to clear up any confusion about timing. Can I be more exact? Is there an ideal starting date? Is there an ideal ending date? Is there an ideal average profit per trade? So, I'm getting into the pragmatic aspect. I'm basically ignoring the academic and looking at the pragmatic. Nothing wrong with that. Especially if you've come here to learn how to make money using this wonderful tool, seasonal cycles and cycles themselves.
Completing the search, this is what I get. computer says for Alcoa stock, the highest probability thing that I can do historically in December is to buy end of day December the 15th, exit end of day January the 4th, risking 9% closing stop. If I do that historically, perfect situation, I would have been right 85% of the time or more. [clears throat] Now, I want you to think about that. Who in this business of trading, you or anybody else, has the ability to find or achieve probabilities of 80% or higher. Most traders are thrilled to death if they can be right 50% of the time. But not only do we get exact entry and exact exit dates, we also get a plethora of additional statistics. Average profit in points, average profit in percent, average loss, maximum consecutive wins, maximum consecutive losses, and so on and so on and so forth. It's a m it's a magnitude of order, an order of magnitude much higher than what most people can achieve. So, we now know our best scenario. What else can we do with this data? And remember, I've said many times and I will say again, for me, it's all about the data. It's not about the beauty of the cycle. It's not about the regularity of the cycle. It's not about the fantastic idea behind cycles. It's not about what we can do with it. It's what we can do in order to make money with it. Because, as I said before, they're pragmatic. if nothing else.
So, let's do something else. Let's go to the next slide. The next slide shows this period of time. You'll notice the yellow period to the right over here. That shows this period of time right over here, December 15th through January 4th. And it's highlighted for us so that we can see it more easily. You will also observe that the last two weeks in December show arrow to the upside with 64% and 70% probabilities. What does that mean? It means that historically 64% of the time during this entire period the closing price of Alcoa at the end of this week has been higher than it was at the end of this week and so forth. So, not only do we know the probability of success is high, but we also know that the size of the move is high. A double combination excellent opportunity for traders.
Now, remember I say to you again, 85% is not 100%. That 15% difference when it loses can absolutely kill you. Which is why as a trader or as an investor, you must have a way of managing risk. Fortunately, this process that I'm going through with you tells me that in order to keep my risk low, I need a stop-loss of 9% closing only. Meaning what? If the stock ends the any day after the 15th 9% [snorts] lower than the closing price was on that day, it's time to get out. In other words, we don't want to ride our losses. We want to get out when we have to and follow the rules.
What else can we do with this? Let me show you. Let's go to a closer search. Let's say we were interested in capturing this move from all the way down here to up here. Even though this is the most optimum period for the 85%, can we decrease our accuracy, but at the same time increase the size of the move? We can do that. And remember, it's all about statistics. It's all about the numbers. If you've got the numbers and you got the procedure and you've got the data and you got the methodology, you have everything you need as long as you're managing risk. So, let's check it out. You want to achieve the most amount of profit and we're willing to sacrifice some accuracy for profit. How do we do that? We do another search. And in this search, we change our criteria. Let me show you what I mean. Here we go. Instead of searching for the maximum accuracy which is shown right over here percent win, I searched for the maximum [laughter] average profit per trade. So this is the trade we selected or I should say the computer selected for us to give us the largest percent average profit combined with the largest accuracy and that is right over here November 17th through January 1st or 3rd. Now remember we did not reconstruct this going backwards and asking what worked. We knew the answers before it happened. Win, lose, or draw. So, if you were willing to risk 9% closing stop and you're willing to accept a mere 76% accuracy, this would be the trade you would make. What happened? And remember, as I said before, we knew this before the fact.
Let me show you something. Let's go to the next slide. Here is the current chart of Alcoa as a few days ago. What do we see? Let's take a look. I have marked over here the exact date the 17th on which the trade started. You'll notice that thereafter for about 1 2 3 4 days it languished. This is very important because remember what I said, we cannot expect to be exactly on the date all the time. We know there's leeway. I'm not talking about a 912 millionear cycle here. I'm talking about a very short-term cycle in which timing is of the essence and need to be we need to be surgically correct with our timing because we would give the market a certain amount of leeway. So, if in this example, this stock ended 9% lower than it was on this day, which would put it somewhere down here. We would need to get out. But in fact, it did not do that. It took off vertically, made a beautiful move, but here's the interesting part about it. The size of the move which we knew about in ahead of time to date of this chart was 34%. 34% doesn't happen every day. In fact, it rarely happens. So to know this fact based on history ahead of time is a marvelous thing and certainly something of a true gift that I'm sharing with you. Not that this gift will always be perfect, but it will certainly give you a heads up and give you a head start. But here's the thing. Take note. 34.49% increase. Let's go back a slide. And here we go. Let's look at this column. Percent average profit. [clears throat] Percent average profit 11.21%. So think about this. We were expecting 11.21% average profit per trade. We got in this particular case this year something much better. We got 34.49%. In addition to that, there's something else going on here. If we had decided to wait for confirmation in the form of a timing trigger, those of you who are familiar with my moving average channel method, Williams accumulation distribution and its moving average and two consecutive bars above the top of the channel would have had a buy signal right here. The sacrifice you make in waiting [clears throat] for a buy signal is you lose some of the potential profit but you gain considerable safety. So that's the situation for you right now.
Now what happens interestingly enough within this pattern is another pattern and let me share that with you. Remember that you can chase patterns down to their nth degree if you want to, but that will really not help you. You'll be chasing your tail. So, what you want to do is find patterns that not only make sense and make [clears throat] money, but patterns that you can understand and relate to. Patterns that you will be very clear in terms of their ability to be programmed and recognized by the computer. I'm going to show you one of those patterns. Let me show you this chart. I'd like you to study this chart momentarily before I give you the answer. This chart we're looking at is the same as this information right over here. So we simply taken this information, stripped away the moving averages, stripped away all the colors and kept only one two colors, the green and the black. The starting date for this move was right over here. You recall this was the ideal entry date. It then went up and came down a few times and then proceeded [clears throat] to where it is today. I would like you to look specifically at the green colored bars. Compare the green colored bars to the black colored bars. Test yourself. See if you can discern the pattern before I give you the answer.
So the green bars are specifically green because they have a pattern that you may not recognize upon first examination. But if you spend a few moments and look at it, you will find a very interesting pattern. What is that pattern? There are several going on here at the same time. Let me help you with that. First, in every case of the green bars, the closing price or specifically this price here was higher than the opening price in every case. Let me go through it for you. Close greater than open [clears throat] right over here. Close greater than open. Close greater than open. Close greater than open. Close greater than open. Close greater than open. etc. In every one of these cases, close greater than open. Think about that for a moment. That's a pattern within a pattern. In the case of the black colored bars, close with less than open. Close less than open. Close less than open. Close less than open. Close less than open. Interesting. Yes. This is a characteristic of a bull market or a bare market. In a bullish market, in other [clears throat] words, a market that's moving from the lower left to the upper right, usually on a 45 degree angle, the close is greater than the open. We can define a market trend by [clears throat] looking at the relationship between the close and the open. In a declining market situation is opposite. Close less than open, close less than open, close less than open. moving from the lower left from from the upper right to the from the upper [snorts] left to the lower right.
But there's one more pattern here that's super important. See if you can test yourself and discern that pattern also [snorts] located within the green bars. Think, think, think. Look at the size of the green bars. In other words, the range of the green bars. You will find that the range in the green bars, the difference between the low and the high is very large. The largest range bars on this chart overwhelm the lower range bars. In other words, large range bars here, large range bar here, large range bar here and here and here. And remember that a large range bar is defined in relation to its previous bar. So this would be a small range bar in relation to a large range bar. This would be a large range bar compared to the previous day. In this case, they would be about the same. This one and the one before it. Why is that important? The concept of expansion of range. In other words, the difference between the high and the low range is very important. Why? In a bullish market, traders chase prices to the upside, which is why the close is usually greater than the open because during the day there are more buyers than sellers, which is perfect example of economic theory, right? Supply and demand. In addition to that there is so much demand the range of trading to the high and the low expands itself significantly. So these two qualities are very important for traders and investors. [clears throat] Expansion of range and close greater than open. There's a great deal more we can do with these two concepts. We'll do that in the future. I just want you to understand these two as very important in the scheme of things. Try them out yourself and see if they help you.
Let's go on to something entirely different but not entirely different. Let's go on to the seasonal preh holiday trade. So this relates to the work of art merill which I've shown many times in these sessions or in other words the preh holiday seasonal the tendency for stocks to close higher on the day before a major holiday. example Christmas, New Year's, Veterans Day, Fourth of July, >> [clears throat] >> etc. The pre-H holiday spread of effect means this tendency to go up before holidays tends to occur even before the day before the holiday. So, Art Merrill in his great book, The Behavior of Prices on Wall Street talked about this extensively. In previous sessions, I've shown you this relationship. For example, the Thanksgiving Day pre-H holiday trade. Thanksgiving Day in the United States is always on a Thursday. It is always the last it is always the last Thursday of November. So, how would the trade work? And those of you who are familiar with my work know that I showed this several weeks before it happened because I believe traders need time to make up their mind [clears throat] as to how much they want to or don't want to invest or to determine if they feel that tendency will occur this year. So this is the trade that I gave. 27th of November was a Thursday new the Thanksgiving day. And the rule was very simple. Buy any one of these symbols. Market on close Tuesday, exit market on close Wednesday. Ultimately very simple to determine risk and limit risk. You can do it in an option. a high delta option call option or an option close to the money or an option that just has a few days to expire will be your lowest risk because you could lose the entire option value if it's wrong. So the question is how can you maximize the result and what happened? Well, first let me show you something else. This was the rule. The probabilities were very high and the rule fit into the trading model and this was the result. This was the day before. This was Thanksgiving right here. Very limited trading. This was Wednesday. This was Tuesday. So, having bought Tuesday on the close [clears throat] and getting out Wednesday on the close was the trade. I've [snorts] been in this business long enough to know there will always be some idiot who says, "Well, if you're so damn smart, why didn't you buy it here?" Well, you could have using other tools. Or they'll say, "If you're so damn smart, why didn't you buy the open?" It's not a question of how smart I am. It's a question of how stupid other people might be or were they willing to break the rules or follow the rules. The rule is what it is. It doesn't guarantee that we will capture everything. It simply says this has happened in the past. It is likely to continue in the future. What you do to massage it or make it better is entirely up to you if you have other tools.
So, now let's go to the next seasonal trade, pre-H holiday trade, and that's the Christmas trade, which is coming up. Let's look at the rule. One moment, please. Here's the rule. [clears throat] The Christmas preh holiday trade. Christmas is the 25th of December, which this year is a Thursday. So, the rule would be very simple. Buy market on close Tuesday, exit market on close Wednesday. Same vehicles, S&P futures, S&P cash, the Dow, the [clears throat] diamonds, the spiders, the um Russell 2000 or the OAX option. Same strategy at her close to the money. Let's see what happens. [clears throat] We know this. We know this in advance. No, no guarantees. Not perfection, [clears throat] just a whole lot of history and a whole lot of very positive results. Let's take a look at what happened last year. Let me go to that slide. So, this was last year, Wednesday, Thursday, and [snorts] there's a result. Again, as I've said before, there will always be someone who says, "Why didn't you buy the opening on Wednesday? Why didn't you buy it over here? Why didn't you buy it over here?" None of that is of interest to me whatsoever. I'm only interested in results.
And remember, one last thing before my voice runs out and before I go, there are three major c indicator categories. Lagging indicators. [clears throat] These are the typical indicators based on closing moving averages. They are right about 30% of the time to 40% of the time. They tend to be very late and you will lose a lot of money especially if you cannot tolerate significant [clears throat] consecutive losses. There are also leading indicators. We have just looked at leading indicators. cycles, seasonals, patterns are all leading [clears throat] indicators. Leading indicators are very helpful and those are the ones you want to spend most of your time with especially if they have predictive validity. And then of course you have current indicators such as seasonals which are bottoming right now or topping right now. So these two are the best ones you can get leading indicators or concurrent indicators.
So let me review what we've covered today. before I run out of voice. Number one, seasonals are not perfect, but they're very accurate. Seasonals give you an opportunity not only to see what should be done ahead of time, but also to determine how you can decrease your risk, maximize your success, and improve your overall results. In addition to [clears throat] that, seasonals gives us seasonality gives us the luxury of being able to plan ahead for moves. Not only in terms of when to get in, when to get out, but also in terms of accuracy and [snorts] average size of move up or down against you. Very important. [clears throat] We also looked at the two coming seasonal trades. Well, actually, we looked at one. We looked at the historical performance of the Thanksgiving trade and we looked at the coming performance of the [clears throat] Christmas trade. Remember this historically this data goes back to the late 1800s based on the work of Art Merrill. But furthermore, it's important because we know it ahead of time and it is based on a vast amount of data. It's not a theory. It's not a seasonal aspect based on a theoretical consideration. It is a fact. You're much better dealing with facts than you are dealing with expectations and suppositions.
So again, [snorts and clears throat] the last question, why does it happen? I have no idea. You can say that it's euphoria. Traders get excited before holidays. They're euphoric and they'll buy anything. They tend to [clears throat] have a bullish approach before holidays. I honestly don't know. But I do know this as the last point from the analcts of Confucious. Teachers can't be gatekeepers. 13.39. I'm not intending to be a gatekeeper. I don't want to restrict what you do, but I do want to have focus and squeeze you into this little narrow little area which has high accuracy [clears throat] in which I hope you will see for yourself that it works. It's not perfect. There's always a risk of loss, but it is applicable to many different situations and if nothing [clears throat] else is clear, algorithmic, [snorts] and exact. So, thank you, Foundation, for the opportunity for this old man with a horse voice to present his knowledge to you in the hope and the expectation that it will help you. I hope I get the opportunity to do this again and that by then my voice coach will have trained me better to give you a better representation of who I am. Thank you everyone. [music] [music]