2006 turned out to be quite an exciting year for short-term traders and investors alike, as the markets ended overall with healthy gains for the year, the DOW printing all-time highs, and great improvements in trading ranges. For the DOW and S&P500 Indices, the Bulls dominated throughout the year, and with the exception of a brief summer appearance, Bears were nowhere in sight in these markets as it continued to march higher, particularly in the latter half of the year. The advances that occurred in the second half of 2006 are some of the most solid and sustainable advances, unseen since the late 90's. Quite interestingly the strength of the markets are very broad in nature, from Energy to Pharmaceuticals to Banking, the participation was widespread – very different from the late 90's which was technology driven. All told, the DOW returned a strong 16.3% for the year, while the S&P500 returned 13.6% - well ahead of its historical average of 10.4%.

The story was a little different over at the Nasdaq. Although it had returned a total of 6.7% for the year (Nasdaq-100 basis), it did have a 12% drawdown during the summer sell-offs. In other words, in order for long-term investors to have achieved that return, they would have had to hold through twice the "heat" which, in the stock market, is our alternative word for "risk." Weakness in the Semi-Conductors weighed heavily on the Naz, although strength in the BioTech sector helped boost it into positive territory towards the latter half of the year, to go along with the positive returns from the S&P500 and DOW. Let's take a look at the table to see how this year's performance matches-up against recent years, as you can see it was good year for investors (relatively speaking):

Note that 2006 is the first time that the DOW outperforms the Nasdaq since 2002 – and if you don't want to count the negative-return years, then it's the first time it outperforms the Naz since 1997. 

Not only did the market's returns improve for investors, but trading ranges have widened as well, to the delight of traders. As many will know very well, wider ranges present better opportunities for short-term/ active traders, and 2006 did not disappoint. Let's take a look at the comparative charts:

As we can see on the charts above, the trading ranges for the S&P500 and DOW related markets have improved greatly, which are ideal conditions for short-term traders. Although the Naz (middle chart) does not seem to show a great improvement, let's take a look at it from a different perspective: it's the first time in 6 years that trading ranges have actually increased - we actually have signs of life from our sick patient here! It appears that the downward spiral in the Naz's trading range is ready for a rebound. In that case, 2007 is looking more and more like it's going to be a great year for short-term traders.

As far as direction is concerned, I am favoring the bear side of the market for the year, looking for the largest set of declines since the 2002 lows. The largest corrective action we were given was an 8.4% decline in the S&P500 this summer, and I am expecting that we are going to experience a decline in 2007 of greater magnitude than that. Let's note long-term outlooks should not be confused with shorter-term expectations and operations. In that case, there are going to be a number of key areas for '07 to look out for, and we mark these simply as follows (one for each of the major market measures):

Here's to a good year of trading, and wishing you all a Happy, Healthy and Prosperous Year!

© 2007 Fernando Gonzalez
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Fernando has over 6 years of high volume professional trading experience, with a long-term track record of profitability. He helped develop the original material and coursework for Online Trading Academy. He has designed and individually conducted courses for over 400 trading students and several hundred others in Lectures, Forums and Intraday participation within the Day Trading Education and Advisory Community. He has also co-authored a best-selling book: Strategies for the Online Day Trader (McGraw-Hill 1999), which reached overall best-seller list on Amazon.com & section bestseller list for Barnes & Noble and other notable sources.

DISCLAIMER: 
This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results.

ABOUT THE WEEKLY REVIEW:
The weekly review heavily focuses on the application of Technical Analysis on the Broad Market Levels. You will rarely see individual Stock Picks on the Weekly Review! It is the author's belief that most Individual Stocks (certainly not all) will follow the overall direction of the Broad Market that surrounds them, as well as the Sectors they comprise. Discussion is focused heavily upon the Major Market & Sector price activity. Rarely also will you see discussion of the fundamental, macro-economic or political nature in the Weekly Review. By focusing only on the technical, or price & volume aspects of the major measures of the market, Fernando hopes to satisfy any equity trader's needs for a qualified discussion and forecast of the overall direction of equities, whether it be the Short, Intermediate, or Long-Term time horizons. Whether you trade the Index Futures, Index Tracking Stocks or Individual Equity Market Instruments, having an experienced eye on the conditions of the broad market that surrounds you is extremely important!