Week Ahead: A Potentially Critical Week for Stocks

A generic image of a person on their laptop
Credit: Shutterstock photo

This week is setting up to be a critical one for stocks. With the S&P 500, and to a lesser extent the other major indices, poised at technically significant levels, there will be lots of news to follow, and by the end of the week there is a chance that one or more of the major worries that have been holding back stocks will either be behind us or will have blown up in our faces.

The technical setup should be obvious to anyone who can read a chart. When the S&P 500 started to drop at the end of September last year, it attempted a bounce back once in each of the three succeeding months.

Each time, after breaking just above 2800, it turned tail, with each reversal beginning a little lower than the last. That kind of triple top creates a strong resistance point. Traders understandably look at that level as one that is attractive to sellers and are therefore wary as it is approached.

If breached though, there is a lot of pent up buying power, and a clean break signals a strong run up, in this case probably to the previous all-time high around 2940. If, on the other hand, the market stalls at the same level again, another significant drop starts to look very likely.

Usually, what is needed to break through resistance like that is a fundamental shift big enough to make technical levels irrelevant, and there will be plenty of chances for that kind of shift this week.

In fact, you could argue that one has already happened. Over the weekend, Donald Trump announced, via Twitter of course, that the deadline for trade talk success had been extended and the increased tariffs threatened for March 1 would not now be enacted. Trump claims that this is because of substantial progress in the talks, but it is possible to look at it another way.

It shows that the deadline was going to be missed. Both sides have restrictive tariffs in place already, and the longer they continue, the more potential there is that long-term damage will be done to both economies. So, while not making a bad situation worse is obviously welcome, there is as yet no resolution to the problem.

Traders seem to be aware of this, as futures indicate that the S&P will open less than half a percent higher than Friday’s close, a decidedly underwhelming response to the news.

This week could also prove pivotal on the political front. As the Mueller investigation is reported to be coming to a close (or is it?), the President’s former attorney and confidant Michael Cohen will offer testimony to Congress. Neither will provide anything definitive, but by the end of the week we could well at least know if the uncertainty caused by political upheaval is going to continue.

More directly relevant to the market and the economy, Jerome Powell, the Fed Chair, will also be testifying to Congress later this week. Again, given the nature of such things, increased confusion about the Fed’s intentions is more likely than any clarity following the testimony, but the parsing of Powell’s words will create the kind of uncertainty that usually results in market volatility.

With all of this going on, it is hard to escape the feeling that something has to give over the next few days. It could be that some degree of resolution to several major issues emerges. In that case, the S&P 500 would break above the resistance, signaling significant gains in coming weeks. Or, we could end this week once again bouncing off the level, making it that much stronger and causing another selloff.

I would love to tell you which of those it will be, but any attempt to do so would be nothing more than a guess. On balance, with Powell’s testimony most likely to reiterate the Fed’s new-found reluctance to raise rates much further, a move higher is most likely, but the risk of a sharp decline is too great to make it worth trading based on that assumption. This, then, looks like a waiting week for investors.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

Read Martin's Bio