2005–A trader’s market…and a look ahead to 2006
Dave Landry is principal of Sentive Trading, a money management firm, and a
principal of Harvest Capital Management. Mr. Landry is the author of two top
selling books,
>Dave Landry’s 10 Best Swing Trader Patterns And Strategies and
>Dave Landry On Swing Trading.
If you would like a free trial to Dave’s Nightly Swing Trading Alerts Report
Dow 14,000 By Year End?
My first column of 2005 began with a prediction of Dow 14,000 by year end. Of
course, this wasn’t my prediction. I don’t do long range predictions. I was
simply pointing out a conversation I had with my mother-in-law at New Years Day
dinner. To recap:Â
Dow 14,000 By Year End?
On New Years Day, I had dinner with at my
mother-in-law’s house.
Mother-in-Law: I read where the Dow would be at
“14,000 by year end.”
Me: (with my head hurting from too much New Year’s
Eve celebrating). Groan…(under my breath).
Mother-in-law: What do you think?
Me: Well, long-term predictions of stocks are
difficult. This is why I stick to shorter time frames.
Mother-in-law:
But the article said that the economy
will improve and earnings will be up.
Me:
Yes, the economy has been improving for some
time and those arguments make sense. However, as I said, long-term predictions
are tough. And, lately, the market has lost momentum.
Mother-in-law, YOU’RE ALWAYS A BEAR!
I left before dessert.
I’m not always a bear. It’s just that long-term predictions
don’t work. There’s just too much that can happen in the meantime. I prefer to
stick with the short-term and hopefully, through the use trailing stops, catch
the occasional longer-term move.Â
Well, it’s nearly the end of ’05. And, at the time of this writing, the Dow is
actually negative for the year, trading at 10,730–a far cry from 14,000.
A Look Back At A TRADER’S Market
Now, before we look at the here and
now, let’s look at last year. At the time of this writing, the benchmark
S&P 500 is up around 3% (less dividends) for the year. With a return less
then you can get on government backed T-bills, this was not a good
market for buying and holding. However, hidden in that 3 percent return were some very
nice swings:Â
The Nasdaq is up just over 1% for
the year. However, it too had some nice swings.Â
This is not to imply that I
caught every move. As a trend follower, I was often late to the party while
waiting for the trend to develop. I was also often wrong during major reversals.
My point is, in spite of the market’s lackluster performance, there were some
opportunities throughout the year.  This was especially true if you
traded in the strongest (or weakest for shorts) sectors, waited for setups and
practiced proper money and position management techniques such as waiting for
entries, using protective and trailing stops, taking partial profits
etc…(note: for more on this, see my swing trading primer and/or weekly
lessons, email me if you need copies of these).Â
So Where Are We Now?
I hate too read too much into pre-holiday trading. However, you can’t ignore
the fact that the Nasdaq is breaking down out of its sideways trading
range.Â
Ditto for the Ps:Â
So What Do We Do?
As shown above (as of mid-morning Friday 12/30/05), the indices are breaking
down out of their trading ranges. This action creates a zone of “overhead
resistance”–a level where those who bought might be looking to get out at
breakeven. Considering this, I think now is the time to start looking for
transitional (i.e. early trend) shorts. Areas breaking down from high levels,
like the market itself, might be a good place to look.Â
A Look Ahead
As the year winds down, the predictions are being rolled out. I’m already hearing bullish things
about the “January effect” (didn’t happen last year…and where was
Santa this year?) and “money that has to be put to
work.” I’m also hearing some long-term bearish predictions based on
an “inverted yield curve” and a plethora of other scenarios. Me? Again, I don’t make long-term
predictions. I think the best thing to do is to take it one day at a time–look
to predict the short-term, and through proper position and money management,
catch the occasional longer-term move.Â
Happy New Year
Once again, thanks for making this a great year! Your kind words motivate me to
be a better trader and in turn, share that knowledge. And once again, for those that have sent
me hate mail, thanks for the fodder!Â
Best of luck with your trading on Tuesday!
Dave Landry
P.S. Reminder: Protective stops on every trade!
P.P.S. If you would like a free
trial to my trading service, click
here.