Recurring price patterns occur for multiple reasons, the most common being seasonal tendencies - when certain stocks or commodities move in or out of favor due to the time of year. At other times the reason a pattern occurs is not so easy to explain, and yet it exists. The following stocks have shown a remarkable tendency to move higher during the middle to latter part of December, over the last two decades or more. An element of technical analysis is to find repeating patterns and attempt to capitalize on them. While there is no guarantee the patterns will occur this December, or next, history provides a compelling case for trading these stocks in December. Additional analysis methods can also be used to filter out or verify the December patterns in these stocks.
SEE: Technical Analysis: Support And Resistance
Public Service Enterprise Group (NYSE:PEG) has a 26 year history of rallying over a seven-day trading period in December. Every single year, over that time frame, the stock has rallied on average about 3% from December 20 to December 28. The stock recently declined to a significant support level at $29, and bounced off of it. The stock has predominately ranged between $29 and $35 most of the last two years, therefore, there is a significant possibility of a bounce and that once again the historic pattern will repeat. A drop below $29 could trigger more selling though, and an inability to climb above $30 indicates a bottom may not be in place ... which means no rally.
SEE: Interpreting Support And Resistance Zones
Weyerhaeuser Co. (NYSE:WY) has been in rally mode for most of the year, so a December push higher is a high probability. Of the last 25 years, 24 of those have seen Weyerhauser's stock moved up, on average, 4% between December 13 and December 28. One element of concern is the stock made a lower-low in November, falling below support at $26. This could mean the stock will struggle to reach the 52-week at $28.82 set in October. That said, the overall trend is still up. The stock is currently set up for a repeat of its December pattern. A decline below $24.75 on the other hand, the November low, is a bearish signal, which means if the pattern is traded it would be against the emerging short-term downtrend.
Constellation Brands (NYSE:STZ) has a tendency to rally, on average 7% between December 13 and December 31. Over the last 20 years, 19 have been profitable by trading this pattern. Since July the stock has been in a sharp uptrend, which keeps the probability of the pattern repeating at a high. Ideally the trend is strongest if the stock stays above $32. Dropping below that level creates at least two lower-lows and draws the uptrend into question. If the stock is above support at $33.46 (November low) at the December 13 open, that should bode very well for the pattern repeating.
R.R. Donnelley & Sons Company (NYSE:RRD) has been in a downtrend since June 2011. The bear market rallies within the stock over that time frame though have been significant, and quite possibly one of those bear market rallies commenced in mid-November after putting in a 52-week low at $8.72. If that is the case, the bullish pattern which has produced, on average, 3% gains between December 20 and December 28 for the past 26 years is likely to repeat this year. The downside is that the major trend is down, so if the pattern doesn't repeat the potential loss likely outweighs the profit potential.
SEE: The Anatomy Of Trading Breakouts
The Bottom Line
The reason a pattern exists is not always clear, yet certain time frames produce remarkably consistent returns in some stocks. While these patterns are consistent, they aren't a substitute for thorough analysis. A pattern can breakdown at any time, or can deviate from the historic norm for multiple years at a time. Another element that must be considered is risk management. While the patterns have historically produced a profit, that doesn't mean the trader wasn't exposed to a loss while the trade was live. Before trading a pattern, study the market conditions and decide on a stop-loss strategy which is acceptable for the average profit level.
Charts courtesy of stockcharts.com
At the time of writing, Cory Mitchell did not own any shares in any company mentioned in this article.