Looking back at the market, from a technical perspective, there are cyclical factors that made 2006 interesting. One pattern says that the mid-year in the four-year U.S. presidential election cycle — when congressional elections take place — usually establishes a base for a strong “buy” signal in the U.S. equities markets the following year.

Although that may seem like a stretch, there are some elementary underpinnings to this theory.

From a fundamental perspective, the congressional elections often lead to major spending initiatives as politicians try to buy votes. Such initiatives can stimulate the economy six to nine months down the road.

Sentiment also improves during this period because investors generally look at new terms as new beginnings. And, because stocks tend to be a leading indicator that typically forecasts events six to nine months later, herein lies the logic for the rally to start in the middle of the presidential cycle.

Some technicians have argued that last year’s July bottom kicked off the strongest big-cap U.S. rally in some time. This suggests that the 2006 “mid-year cycle” indicator worked in classic fashion.

But, as always, some detractors would debate that point, arguing that the mid-year cycle bottom typically occurs in October, one month before the mid-term elections. However, history suggests that the October time frame is a more recent phenomenon and that, in the longer term, it is apparent that the bottom could occur in almost any month.

But, rather than de-bating the timing, Lawrence Mc-Millan, president of Morristown, N.J.-based McMillan Analysis Corp., which provides options-oriented advice and learning tools (www.optionstrategist.com), believes that the mid-year cycle did work and that, going forward, this typically “sets up a strong ‘buy’ signal for the broad market.”

My concern, however, is the number of analysts who appear to subscribe to the bullish view for 2007. There are not too many bears out there, and Wall Street has a history of doing what is unexpected. So, what I have to ask is: if everyone is in the bullish camp, where will the buying come from?

That does not mean one should stand on the sidelines and worry. But it does suggest that shorter-term trades may be the appropriate way to play the market in 2007 for aggressive options traders. Think of it as “channel” trading, in which the underlying market does not rally sharply nor fall significantly but, rather, remains in a trading channel. Opportunities exist as market indices or individual stocks move from the bottom to the top of the channel.

You can play this by buying calls or puts, depending on where the underlying security is within a channel. This approach has merit because options premiums are still relatively cheap.

If volatility begins to rise, however, you could argue that options writing might work as a channel-trading strategy — for example, buying the underlying stock and writing calls with a strike price at the top of the channel. Or, you could write cash-secured puts with the strike price at the bottom of the channel.

If we buy into a longer-term bullish scenario, then the rally that began in the mid-year of the presidential cycle typically lasts into the year following the next presidential election. In this case, that would be 2009.

According to McMillan: “The quality of such rallies has varied widely over the years, although the third year [2007, in this case] is typically the strongest year in the cycle.”

That said, McMillan does not believe this rally will continue for too long without some serious correction.

And, interestingly, in continuing with these cyclical factors, years ending in a “7” sometimes represent the year after the mid-year of the cycle — 2007, 1987 — and, other times, they represent the year before the mid-year of the cycle. Typically, the year before the mid-year is the most bearish year in the cycle, although there are holes in that argument as well: 1997 and 1977 weren’t particularly bearish, despite the fact that these years both had serious declines in their respective autumns.

Similarly, 1987 should have been a bullish year, and we all know what happened on Black Monday — Oct. 19, 1987.

The goal is to separate the cyclical pattern substance from the nonsense and to try to formulate some vision for 2007. McMillan sees:

@page_break@> a continuation of the current uptrend at a slower pace for at least another three months;

> a return of volatility into the market, especially in the latter half of 2007; and

> eventually, a correction measuring at least 9% (and probably more), which will probably culminate in the September-October time period.

Of course, any forecast beyond the next five minutes can fall prey to macro market-moving events that can never be predicted. Terrorist activity, a change in the U.S. Federal Reserve Board policy or a persistent change in the U.S. government’s economic figures can alter the way 2007 plays out.

In reality, options traders need to keep abreast of the trend and then focus on short-term indicators, making adjustments to strategy selection as the year progresses. When you think about it, short-term options trading attempts to take advantage of noise in the market. And that will only work as long as you are on the right side of the longer-term underlying trend.

Indicators to look at include the Chicago Board Options Ex-change’s volatility index’s (symbol: VIX) put/call ratio and market breadth, particularly if these move dramatically up or down. (The daily numbers are available at www.cboe.com. ) Even now, these indicators are at odds with the year-long trend; thus, this creates opportunities.

In short, the market’s views are not that far removed from mine, and, in many ways, tie into my channel-trading strategy. If the longer-term trend is for moderate growth in equity values — at least, until this autumn — then the opportunity exists in short-term trading within channels.

And that will probably be the strategy of choice for at least the first two quarters of 2007. IE