The Year-End Markup Has Been Successful

Kevin Haggerty is a full-time professional trader who was head of trading for Fidelity Capital Markets for seven years. Would you like Kevin to alert you of opportunities in stocks, the SPYs, QQQQs (and more) for the next day's trading? Click here for a free one-week trial to Kevin Haggerty's Professional Trading Service or call 888-484-8220 ext. 1.

The year-end markup has been successful, as the SPX closed yesterday at 1424.73, +14.1% year-to-date. The cycle high close is 1427.10 on 12/15/06. A +16.8% rally off the 7/18/06 1219.29 low made the year. The extent of the rally was surprising to many, mostly me, because after we called the reversal at the 1320-1327 .707 retracement zone to 1553 from 769, the decline was only -8.1% for the SPX, QQQQ -17.4%, and $COMPX -15.2%. The 1220-1225 SPX zone had lots of symmetry, and was an anticipated key price zone, so our short-term position traders caught that move, but most exited into the .618-.786 retracement zones to 1327. My initial view on Wave 5 up from the 769 bear cycle low was stated in August 2004 at the Wave 4 low of 1061, when the markets were extremely bearish. I said that Wave 5 would reach a minimum of 1305, and probably not higher than 1385, which is the .786 retracement to 1553. The entire rally was very strange after bouncing from the short-term oversold condition. It had mid-term election manipulation by the PPT (Plunge Protection Team) written all over it, and probably the Fed flooding the market with money to avoid a recession (M3 hidden). Also, each time there was a geopolitical crisis or bad economic news that would reflect on the President, there was always the flurry of "mystery" buy programs to keep the ball rolling up the hill. Maybe Henry Paulson (Treasury secretary) also wanted Abby Cohen's 2006 predictions to look good.

The longer-term trading plan into the 1320-1330 zone was to take the money off the table and replace the index proxy positions with the next strike up calls, which would enable further participation on any more upside in the SPX, less the defined risk of the call premiums. If the market were to tank 25%, you would only give back the call premiums, but had already locked in the bulk of your 50-60% share of the +72% SPX gains to 1327. In addition, the money market returns on the money taken off the table would certainly help offset the cost of the calls. Implied volatility is at the lows right now, so it is an even better opportunity at current levels. "They" can't keep the finger in the dike much longer, and I have not changed my view on the time-table for a 4-year cycle low, which I have said for the past 1 1/2 years would fall between 10/06-3/07, with 4/07 a real stretch. That probability is based on the last 13 cycles, back to 1948. The question is, "Was the -8.1% SPX decline the 4-year cycle low?" I say, "No," because it would be the smallest 4-year cycle low decline in history, which is not a very high probability, not to mention it was not even a .236 retracement to 769, which is 1195 with the .382 retracement at 1114. The good news is the 4-year cycle low will be starting from a higher level, and this will probably occur when all the threats of taxation, regulation of industry and protective tariffs come front and center with the Democrats controlling both houses.

There was very little daytrading opportunity yesterday as NYSE volume was 903 million shares, with the volume ratio 40 and breadth -380. The SPX daily range was only 5.7 points, and many of the big cap index stocks also traded well below their 10-day average ranges. There was no real selling pressure; it was just that the generals were winding down the year. If you trade today, look to the first hour strategies, and if nothing happens, start the new year early.

I wish you all a safe and happy New Year,
Kevin Haggerty

Check out Kevin's strategies and more in the 1st Hour Reversals Module, Sequence Trading Module, Trading With The Generals 2004 and the 1-2-3 Trading Module.