Tonight we are going to talk about what our expectations should be for yearly performance and take a look at how our mid-term system has done in 2006.

Our mid-term system was backtested with QQQQ from 1999-2004. Using one of our indicators, the average volatility during that time was 20, while the average volatility from the beginning of 2005-present is 7.5. If we could expect a strong annual gain of 40-50% during a time when volatility was higher (1999-2004), then we could expect an annual gain of 15-19% during the current market conditions. This doesn't take into effect the difficulty of the current trendless or sideways market. If 40-50% doesn't sound high to you for a time when volatility is strong, just remember that Warren Buffet's annualized gain is a little over 21%. The reason we suggest the possibility of 40%-50%, as opposed to the annual gain suggested in our backtested results, is because our trading systems are designed based on statistics and even though we believe we have two extremely strong models, the future will never be the same as the past. Luckily, there is enough consistency in human emotion and behavior to expect gains of 40-50% annually during extremely volatile periods.

So where are we now? According to TimerTrac, we are currently headed for a 2006 annualized gain of 15.7%. As we have just suffered a powerful correction against our buy signal, we can only assume that the gain should be higher than this. Meaning, this will most likely be our largest drawdown for the year. Currently, QQQQ is up 3.45% with our signals for 2006, SMH is up 9.08%, and IWM is up 6.17%. Not bad for just sitting through an 8-10% correction.

The three charts tonight are aimed to show how quickly volatility has increased in the indices we follow. All three charts have the Bollinger Band Width indicator underneath them.

The first chart is of QQQQ. You can see how high the Bollinger Band Width is currently and as this has been the peak area for the last few years, we expect the correction to end in the next few days, if it hasn't ended already. You can also see how QQQQ fell into strong support today. If this support is broken, QQQQ may fall to 38.

The second chart is of SMH. Even though volatility is increasing in the ETF, there is still room to grow. SMH also fell to strong support today. If SMH breaks the first support line, we expect a possible fall to 33.

The third chart is of IWM. The current volatility is extremely high and we feel a reversal is imminent. Even though IWM is also at strong support, we could see a fall to the 69 area.

If the stock market has not already bottomed, we expect the bottom to be in by the end of the week.

Take Care,

Stephen Brown
Founder of Nasdaq Wizard, LLC