S&P Outlook Going Into the New Year

Wow, the year has come and gone, and what a year it has been.  Many day traders I know, including myself, took some time to adapt to the diversity the markets gave us this year, but ultimately if the trader managed to adapt it was a fantastic year indeed.  Opportunities abounded, and heading forward I truly believe we live in a time where phenomenal short-term trading gains are all around us.

In the final week of the year we saw the market continue to break to new (recent) highs above the former range highs, but volume was very light.  Thursday, the final trading day of 2009 for stocks, saw aggressive selling into the close with the S&P falling falling 7 points in the final 25 minutes of trading after another very sedate afternoon.  The S&P closed back within the old range.

On the hourly charts we see something interesting.  Despite finishing within the old range which has been with us since mid November, we do see a possible uptrend emerging; we failed to reach the range lows but made higher highs.    Short-term trend line support comes in at 1104.  Respect, and a bounce off that level and a move back towards the recent highs indicates this market is likely to experience a legitimate upside breakout and the reemergence of a bull rally in early 2010.

On the other hand, a move below 1104 and then 1094 indicates a retest of the range lows between 1086-1084.  Penetration of that level indicates the breakout higher was false and that this market is highly likely to head lower in early 2010.

S&P Hourly Through End of 2009

Fundamentally, as I have said so often before, the economy’s problems have been “solved” by making the problem bigger.  I see this coming back to bite us in the ass…exponentially!  Yet, anyone who really understands economics knows that most of the economic cycle is based on psychology (I can explain this in another post if there is interest), thus if the people buy into the idea that we are all good, then of course the market will go higher…. hence why I am a short term trader – these things all unfold one day at time.  That is how I will trade it – one day at a time based on the prevailing sentiment of the near term.

Starting in 2010 I expect volume to increase.  If this market is to move into a renewed bull rally, volume will need to increase.  If volume stays light or even decreases (!?) this market will stay range bound and decreasing volume is likely to sink it towards the range lows mentioned above.

It has been a strange year; many trading theories fell apart, correlations developed which are not commonly seen, and other correlations that are often seen failed to materialize.  Understanding the market with simple tactics and managing trading capital prudently is paramount to succeed in the new year.   To help yourself, make several trading goals for this year.  Take each goal and break it down to it’s smallest component so a method for attaining that goal  can be implemented methodically and rigorously.  By this I mean, what stocks will you focus on, time frame, volume, stop loss, profit targets, trailing stops, entry method, execution type, etc?  Take everything into account and work out exactly how you can get to your goals in a step by step fashion.

Best wishes in the new year, may this be your (and our’s) best year yet.

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Cory Mitchell, CMT
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