Market Update: 2007 Comes in Swinging!

By: Dominick | Sat, Jan 6, 2007
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The Jan 1st update stated:

Friday's selloff could be a perfect B wave or 2nd 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 selloff is a typical shakeout prior to a market rocketing away from you the next day, a move you obviously don't want to be short against.

And boy was that the truth!

The SPX vaulted from that perfect bear trap and screamed up 13 points after the long weekend, the first day of the trading year. Of course, nothing had changed over the weekend - we basically just identified what target the market was selling into on the previous Friday and caught the falling knife. Shorts scrambled to cover all the way up on Wednesday morning since they had no idea where the rally would stop.

For a while, even I thought it might have been going to ring the bell up at a higher high, but then, as the market started executing those sell orders the Fed minutes came out and simple selling turned into a melt down. The mornings rally now became a bull trap. As I'd been predicting for several weeks, the first trading day of 2007 became a flood of red.

Feeling that the selling was a bit overdone, particularly since the underlying situation hadn't really changed, I posted at 9:40AM on Thursday that I was looking to buy a double bottom. The S&P immediately stopped at the previous day's lows and rocketed up 13 points. Amidst the advance, the chart below was posted to the forums, showing my target area for the move. The ES futures ultimately stopped at 1431.50, right in the zone.

On Thursday night I posted a review of the week's action on several indices and backed up my ideas for Friday with the following chart, showing two SPX possibilities to watch going into the jobs report. There was also a low risk setup to go long the Russell 2000 into Friday's lows, but it had to be closed out with a few point loss, due to it trading under our limit of the pattern.

The primary black count seems to have taken control and down she went, proving that we're already seeing what I said last week would be a multi-swing year. With volatility like this week's, you could say traders will be very happy.

As such, I expect TTC members to be very active over the next twelve months. Active, that is, playing the reversals and making money, not just always looking for THE top. Yes, I am looking for the top myself, and yes, maybe the market is ahead of itself, but that doesn't change the markets' internal clock. It'll get there when it gets there, just don't make the same mistake most made in the summer of 2006 and stay on the sidelines for a huge rally (or worse, get short). The market will tell you what it's doing and if you're able to see it, and go with it even if against the crowd, you're a winner. Otherwise, it'll always take money from you. Our theme this year is to capture all the great swings the markets will be giving us for 2007.

But, of course, you still want to know whether we topped this week. Let me simply continue to say that there is no confirmation of a top yet at this time. Are we close to one? Probably closer than many believe but there might be one more candle to blow out. Sure, we sold off and the market was heavy, but take a real good look at where we're at. First, there was no damage to the uptrend. Second, after a 200+ rally, being just 20 points off the high isn't anything to get excited about. Third, the NDX is now outperforming.

The chart above shows that the concern I had last week has resolved itself. The divergence between the SPX and NDX has turn dramatically this week. As the rest of the markets kept looking heavy and selling off, the NDX acted as if rejuvenated, and is now ready to lead once again. On Friday the NDX would not give in to a selloff. That's not necessarily a sign of weakness, but, in fact, probably more of a bear trap. Of course we'll monitor this developing situation very carefully early next week as from this point, it can cause damage to the uptrend.

Last week's line in the sand was SPX 1404 and this week's low was, 1405.75. I'm going to adjust that number for next week as we have a pattern in play which, I think, is completing, not beginning. I may not be able to pin it down to the exact tick, but we'll aim to keep the SPX above 1398/1402 to justify additional gains. If it loses this area, and remains under, we'll focus on the 1377/1400 range.

I'm hoping to see a bit more selling next week, but wouldn't be surprised if the market starts advancing from Sunday nights globex, hinting that a short term low is already in. Any advance must take out the 1416 area in the SPX or sellers will come in. For the exciting intra-day developments, join us on the forums and in the chatroom for 1 ES point a month ($50)!

Of course, many markets often get dramatic moves during the first week of a new year and this one was no different. The following are just a few of the other issues covered at TTC.

Google

I have been talking about Google reaching its triangle target perfectly but would it reach a fib target. There is a case to be made that is now trying to reach that target. If the NDX continues to outperform the rest of the markets next week, it strengthens that case. The drop from the highs seems to be unfolding in 3-wave patterns witch also support this case. If that's not the case, then Google will simply roll over soon and give you an excellent shorting opportunity.

Crude oil

Unlike many other traders who think oil will continue to sell off, we don't think so. It seems this was maybe the hardest hit market for the start of the New Year, but oil isn't about to go to $30. We were waiting to find a trade in oil as it was stuck in a range, but now, with the recent moves, we have something to work with. If you believe in buying low to sell high, then you should start paying attention here. I am interested in seeing how it trades around a target I have of 54.61, after it does some consolidation work, possibly next week. If for some reason it has already put in the low, then we're willing to chase. But I do feel we can wait. On USO, the ETF, I have a target of 46.18

Bonds

After calling a top perfectly in bonds, we were looking for a turn to get long.

The New Year immediately produced that bounce I thought was due. Bonds rallied right into the payroll announcement producing a nice trade. Fading that move as it hit the lower channel of the previous rally, were instant profits at Friday's announcement.

Grains

Last week I stated,

"Grains continue to rally but I feel that it's not the start of another leg, but rather part of the correction. If correct, we will be much lower soon."

We are getting close to being correct on that idea. We did trade soybeans short from 688 and watched them fall into Fridays low of 670. Any strength from here would not be part of our plan and we would adjust the pattern,

Metals

The metals were the cream of the crop this week! We have been alerting that Gold was either doing a triangle or something much more bearish. Friday alone saw the metal drop 24 points before closing down 19. Another whopping 3% in 1 day!

This week, a short trade was worth 44 points or $4400 per contract

We are going to go with the painted triangle for now but there is another great pattern that I will use immediately if I have confirmation.

I also wanted to see another low in Silver and got it! Down almost 5%, or $3400 on Fri alone. For further updates on these markets, be sure to read Joe's weekly Precious Points updates.

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Dominick

Author: Dominick

Dominick,
a.k.a. Spwaver
TradingTheCharts.com

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