2006 turned out to be quite an exciting year for short-term traders and investors alike, as the markets ended overall with healthy gains for the year, the Dow printing all-time highs, and great improvements in trading ranges. For the Dow and S&P 500 Indices, the bulls dominated throughout the year, and with the exception of a brief summer appearance, bears were nowhere in sight in these markets as it continued to march higher, particularly in the latter half of the year. The advances that occurred in the second half of 2006 are some of the most solid and sustainable advances, unseen since the late 90's. Quite interestingly the strength of the markets are very broad in nature, from Energy to Pharmaceuticals to Banking, the participation was widespread ââ,¬â€œ very different from the late 90's which was technology driven. All told, the Dow returned a strong 16.3% for the year, while the S&P 500 returned 13.6% - well ahead of its historical average of 10.4%.

The story was a little different over at the Nasdaq. Although it had returned a total of 6.7% for the year (Nasdaq-100 basis), it did have a 12% drawdown during the summer sell-offs. In other words, in order for long-term investors to have achieved that return, they would have had to hold through twice the "heat" which, in the stock market, is our alternative word for "risk." Weakness in the Semi-Conductors weighed heavily on the Nasdaq, although strength in the BioTech sector helped boost it into positive territory towards the latter half of the year, to go along with the positive returns from the S&P 500 and Dow. Let's take a look at the table to see how this year's performance matches-up against recent years, as you can see it was a good year for investors (relatively speaking):

Note that 2006 is the first time that the Dow outperforms the Nasdaq since 2002 - and if you don't want to count the negative-return years, then it's the first time it outperforms the Nasdaq since 1997.

Not only did the market's returns improve for investors, but trading ranges have widened as well, to the delight of traders. As many will know very well, wider ranges present better opportunities for short-term/ active traders, and 2006 did not disappoint. Let's take a look at the comparative charts:

As we can see on the charts above, the trading ranges for the S&P 500 and Dow related markets have improved greatly, which are ideal conditions for short-term traders. Although the Nasdaq (middle chart) does not seem to show a great improvement, let's take a look at it from a different perspective: it's the first time in 6 years that trading ranges have actually increased - we actually have signs of life from our sick patient here! It appears that the downward spiral in the Naz's trading range is ready for a rebound. In that case, 2007 is looking more and more like it's going to be a great year for short-term traders.

As far as direction is concerned, I am favoring the bear side of the market for the year, looking for the largest set of declines since the 2002 lows. The largest corrective action we were given was an 8.4% decline in the S&P 500 this summer, and I am expecting that we are going to experience a decline in 2007 of greater magnitude than that. Let's note long-term outlooks should not be confused with shorter-term expectations and operations. In that case, there are going to be a number of key areas for 2007 to look out for, and we mark these simply as follows (one for each of the major market measures): 

Fernando Gonzalez is in his 10th year as an active trader, technical analyst and content contributor to the active trading community and a long list of popular financial media.  Online Trading Academy trading knowledge...your most valuable form of capital.