Many people want to trade the Dow Jones index, and wonder where to begin. There are all sorts of price following methods for trading stock market turns such as moving averages, the moving average convergence divergence indicator (MACD), trend line breaks. There are stochastic indicators like the Williams %R, the relative strength index, and stochastics. There are stock market timing mechanisms such as cycles, Elliott waves, Gann angles, and astrology projections. And of course there is seasonality.
Let us start with seasonality. Most everyone knows that stocks follow a quasi-regular seasonal trading pattern, and investment researchers have been able to improve upon the basic seasonal cycle (“sell in May and go away… until November 1”) by putting timing models on top of a basic timing expectation. So how do you do this?
The first step to improving upon this basic method is to first see what the basic seasonal pattern is that the market seems to be following. For instance, of this writing the best way to calculate a seasonal pattern for the Dow macd histogram Jones Industrial average would be to take 45 years of past Dow Jones history to create a basic seasonal chart. Whether to use 45 or 50 or even 10 or 20 years of data is a complicated process of finding which time period worked best in forecasting the market over recent time periods, and which is likely to continue to be best for the near future projections.
The next step is to take this basic set of price and create yet another seasonal chart from a more limited subset of data, namely the years that look the most like this year in question. This will produce a more accurate chart that matches the past history as well as future price projections for the Dow.
Now you are ready to “time the market” with a method so simple that even Jimmy Buffet would love it. You have an expectation of the upcoming stock price seasonal pattern, and only need a price trigger to tell you when to get in and out of the market. Which one do you use?
Moving averages are rather slow. Relative strength and stochastic indicators are too fast. A method that many researchers have found works quite well is to use a MACD indicator on top of the timing expectations you just created. You look at your seasonal chart to see whether a high or low might be upcoming, and then watch for a MACD cross-over signal indicating either a “buy” or “sell” for the index right around those expected market turn dates. That is the basis of using simple seasonal charts, made adaptive to the market, to create a superior timing mechanism for the Dow.
Can you improve upon this even further? By constructing “factor seasonal” charts of the seasonal pattern of the Dow during different economic environments, such as rising or lowering interest rates, and then seeing which of these “factor seasonal analysis charts” the market is following, one can improve on the basic pattern even further. Day traders love these charts because they reveal the secret underlying patterns that the markets are following. This is decomposing the effect that different factors have on market performance dynamics. You can even use this basic method for market timing individual stocks in the Dow Jones, S&P500 and NASDAQ in dices. It is just a matter of your time and efforts.