Jan. 2, 2007 — In the Dec. 23 update, I wrote:
Next week, if the larger bullish pattern is to unfold from here, it must follow strict instructions. I would love to see a three-point dip on Tuesday, followed by an advance that lets no one on board. Early projections are 1445.80 and 1452.25, with any new high being acceptable.
As you can see, either way, Tuesday will be anything but boring.
Other than the three-point dip in the SPX at Tuesday’s open, that did not happen. The last week of the year unfolded pretty much as expected with a slow but steady advance. Looking for a new high, that is, not counting the previous week’s high as the top, was the correct call because, even though it was a boring holiday week, the SPX moved up almost 18 points within the first trading two days. The next two were spent almost entirely stuck in a range until traders decided late Friday they wanted to get out before year-end and closed the week at an exact Fibonacci .618 extension off the week’s low, and sitting atop two support trendlines. Again, the perpetual question at these lofty levels is whether the latest high was indeed the top. Has the market danced its last dance?
I am sure the action in the last hour of Friday was fed by the emotions and sentiment of underperforming traders forced on the floor during the holidays, but if you think that was nasty, you have not seen anything yet! 2007 will be marked by choppy, intra-day reversals as the stock and bond markets finally confront some of their long-running inconsistencies, but if you have the correct setup, pattern, count or target in a market, then you’ll know when a sell off like the one we got on Friday is actually a perfect buying opportunity.
For many traders, though, Friday’s late day trading is exactly how and why they lose money. As the previous chart shows, Friday’s sell off could be a perfect B wave or second wave pullback into a .618 retracement. Of course, for traders using a 2- or 5-min chart, it must have looked like sailing over the end of the world. Too many times, this type of sell off is a typical shakeout prior to a market rocketing away from you the next day, a move you obviously do not want to be short against. But, the risk of going long here, even if completely wrong, is tremendously narrowed by having Friday’s decline behind you. This setup will be developed further for members in the forums.
Some of you may remember that several weeks ago I stated Jan. 2 was a good date to keep in mind for selling, and now here we are and I have just given you a buy setup. This is just another example of me letting the markets do the talking while staying vigilant for money-making opportunities. Of course, the second is now a holiday because of President Ford’s funeral, but my general idea remains the same for whichever are the first few trading days of 2007 and the chart below illustrates my concern about getting too cute here on the long side.
Upward projections of 1445.80 and 1452.25 are still valid, with any new high being acceptable, but, as you can see, chances are great that if the SPX makes only a slight new high, the NDX wont. And losing 1404 can change ideas about reaching an additional high at all – it is quite possible Baby New Year will be born a bear! Of course, if the New Year’s party goes on late and there is a new high we can get long into, that would be great but, like any respectable guests, we will not be looking to overstay our welcome either. We will continue to monitor sentiment and ending pattern divergences, and we have not forgotten NYSE 9314 either.
Regular readers will know that once the 1360 target was achieved, I have been dancing with the bulls with one ear waiting for the music to stop. If I’m right, and it’s just about time to go home, then these last moves can and will always be tricky, but there may be time for toe-tapping yet. We are not looking to give readers a bias to what must happen, but given Saddam’s execution and the Ford funeral, general sentiment alone might push us up Wednesday morning. If we get this type of dramatic reversal to early new highs, we might be able to start building a short position this week, or if not then, into the second week of January, because this new high would look like a top. Yes, the top.
Even if we are about to witness the last gasp of a six-month rally, I do not want to assume anything needs to happen. We were, and still are hoping this past week started the last ABC run into new highs. As of Friday’s close, there isn’t much room for error, but the outlook hasn’t changed. If correct, we should start the week going higher and put in a new high soon. What I mean is Friday’s late drop might be a gift of a setup opportunity to catch yet another move to new highs, but, if the market smells weakness on the way up, that might all change quickly, Of course, these are the types of developments that are posted for members in the Forums in real time.
And let me finally add that, thanks to the cooperation and community spirit of everyone involved, the first year of tradingthecharts.com has been a success! I've personally enjoyed sharing the time with all my subscribing members in the forum and chat room, and look forward to working with them in what promises to be a very interesting 2007. Hopefully you readers of these updates have also been able to capture some great trades. To capture what a weekly newsletter can never really do, join the TTC forums daily for the incredibly affordable payment of only $50 a month.
Dominick Mazza
Trading the Charts
Dominick@tradingthecharts.com
Market analysts are always welcome to contribute to the Forum or newsletter. Email me @ Dominick@tradingthecharts.com if you have any interest.
This update is provided as general information and is not an investment recommendation. TTC accepts no liability whatsoever for any losses resulting from action taken based on the contents of its charts, commentaries, or price data. Securities and commodities markets involve inherent risk and not all positions are suitable for each individual. Check with your licensed financial advisor or broker prior to taking any action.
