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Old 12-19-2012, 03:45 AM   #1

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The Christmas Trade

With Christmas just around the corner I thought it would be fun to see how the S&P behaves in the days just before Christmas. Do the days just before this holiday tend to be bullish, bearish or neutral?

To test the market behavior just before the Christmas holiday I will use the S&P Cash index back to 1964. I will create an EasyLanguage strategy that will enter a trade X days before Christmas and close that trade on the opening of the first trading day after Christmas. Each trade is scaled based upon a 2% risk of a $50,000 trading account. To define risk I will use three times multiple of the 10-day ATR. Returns are not compounded and slippage or commissions are not deducted from each trade. Stops are not utilized in this study.

Ten Days Before Christmas

First let's look at the ten days before Christmas. What happens if we enter a trade X days before Christmas and close that trade on the open after Christmas? By using tradestation's optimize feature I can systematically test each day over the historical data. The results of each test is the generated P&L for each iteration and is depicted in the bar graph below. Looking at the graph each bar on the x-axis represents the number of days before Christmas.



It appears the 10 days before Christmas all show positive P&L. In general, the longer your holding period before Christmas the better.

Ten Days After Christmas

Using a similar trading system I will not look at entering a trade on open of trading day following Christmas and holding that trade for X days. Below is a bar graph showing the days 1-10 after Christmas. Again, each bar represents P&L and the x-axis is the number of days the trade is held.



Historically, all days after Christmas in our study have returned positive results. Unlike the 10-days before Christmas, in this case it appears there is not much gain for holding beyond 5-days.

The Christmas Trade

Based on the information above which seems to show a strong bullish biased for the days immediately before and after Christmas, I'm going to create another strategy that will open a trade five days before Christmas and closes that trade five days after Christmas. I picked five days simply because it was the middle value (1-10) for the days before and after Christmas we tested. The results are as follows:



How does the overall market regime affect the performance of this system? I decided to test this strategy against a bull or bear market. I used a 200-day simple moving average to divide the market into a bull or bear regime. I first tested taking trades only when the market is within a bull regime (above the 200-day SMA) then tested taking trades when the market is in a bear regime (below the 200-day SMA). The results show the Christmas edge holds up well for both regimes.



Conclusion

There certainly does seem to be a very strong bullish tendency around Christmas. Can you take advantage of this in your trading? Perhaps. Remember, the code provided below this article is not a complete trading system, but an indicator to help me gauge the market behavior around the Christmas holiday. If you have trading systems or trade a discretionary method around these days before and after Christmas you might use this knowledge to ignore short signals, or modify your exit.

The EasyLanguage code used to generate the Christmas Trade can be downloaded here.
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