Thursday, April 24, 2014

Useful Questions About The Indicator


Today we are going to answer some great questions from Mike.

Hi Jon,

I captured this screenshot from INTC and highlighted two questions:

In the upper panel would it be correct that the highlighted area is a mix of bull and bear periods but the time beyond is predominantly bullish?

You are 100% correct. The 'Historical Seasonality' indicator is telling you, based on historical data, how many patterns are currently long and how many are short. 'Sell in May' is clearly reflected in the indicator, primarily for 7-30 day patterns. That said, there are still patterns of longer duration that are bullish for 30-90 days, which explains why periods beyond May/June are predominately bullish. 

In the second panel (which appears to show the "reliability of patterns) I have two questions:  1.  would we consider the mid-March to Mid April period to be less reliable than the more green areas such as mid Feb to mid-Mar?  2.  why is there no region shown from now to next few months )highlighted blank area) as this would seem to be the most important period?

Great question. So the top indicator is historical seasonality, but the bottom indicator answers 'how seasonally is the stock behaving this year?' As you see, 'Successful Patterns' are 80% red, which is because 80% of active patterns for INTC are moving against their historical averages. The reason why we do not see any data for May/June is because it is because there are no observations yet for 2014. This indicator is useful in determining whether a stock is currently behaving seasonally.

Looking further down the INTC page, on the weekly summary:

Is this the correct understanding of the headers:

Avg Gain would be for an up weeks only? Correct with out looking at losing years.
Avg Loss would be for a down weeks only? Correct without looking at bullish years.
I am a bit confused on avg G/L compared to the Avg gain and Avg Loss. The average G/L is takes the average of all the data; this is the most useful figure. In the above example it is telling you that during the week of July 01- July 06, the average move is negative 1.5%.

As far as application is concerned, one approach I would like to consider is buying a longer term ITM option - say using your 63 or 91day period and then selling the OTM weeklies against it for weekly premium income (I think most would call this a diagonal spread).  Do you have experience with this approach?

Yes, that is a great approach to trading. I encourage traders to use vertical spreads and/or calendar spreads, but the diagonal captures the best of both worlds by using different strikes (like a vertical) and different months (like the calendar). You have a bit larger margin since the strikes are apart, but you are going to quickly benefit from time decay. Tomorrow we will model a diagonal (or double diagonal) based on an upcoming seasonal pattern.

Thanks Jon,



If you ever have any questions about Seasonalysis, feel free to send me an email at As always, stay smart and trade safe!