Tips on Technicals - Expired Futures
Because futures contracts have limited lives, several techniques have evolved to allow for long term analysis. Perpetual contracts, which link the currently active months of a futures contract together, and Synthetic contracts, which create a weighted average price for near month contracts, are two ways to do this. The third way is to examine past trading activity together with the current trading activity to see what patterns and characteristics are common across all time periods for that specific futures series. By overlaying expired futures data with current futures trading, relationships of time and of seasonality can be explored.
Expired Futures Overlays
Expired futures can be overlaid in several different ways. First, prices from the same contract months but in different years can be analyzed. For example, compare March 1995 Wheat to March 1992 Wheat (Figure 1). By overlaying two or more contracts with the same expiration month in a relative time alignment (days are lined up but years are ignored), seasonal behavior can be analyzed.
Figure 1
Are any price patterns evident over the years? Were there any abnormal price swings due to unusual supply and demand conditions? For the grains, how did this contract look during the last drought compared to the current one? For the bonds, what were trading conditions like during the last two interest rate changes and are there similarities? Notice that in this case the two Wheat contracts showed similar trading patterns prior to and during the strong rallies that started in June of their respective years. Does this activity help forecast the strength of the rally?
Second, different contract months can be aligned by expiration date. The April Gold contract behaves differently from the December contract. How did the various contracts behave as their respective expirations approached? With expiration time alignment, price action for any delivery month can be analyzed against another regardless of the year and the date.
Figure 2
Does the contract for physical delivery (Gold) behave differently than the contract for cash delivery (Stock Index)? What happened the last time there was a short squeeze (not enough physical commodity to cover all outstanding futures positions near expiration)? Figure 2 shows four different delivery months and years for Gold. Each of these contracts showed a slight rally in the week or two before expiration. By checking additional contracts, it might be possible to find a pattern and hence a trading opportunity.
All of these questions can be answered with expired futures. Unlike simple long term analysis of a perpetual contract or cash index, actual trading patterns can be viewed together in the same portion of a chart. The analyst can see both time and price relationships more accurately than by doing local analysis in different portions of the display.
