Key To the Market This Week – Bearish Sign If This Level Tested Again

Posted 9:30 AM ET - The market surged higher in January and the tone soured quickly. February was nasty and the lengthy bottoming process indicates selling pressure. In the past few years stocks have quickly recovered from big drops. That is not currently the case and we can expect nervous action this week. The most critical number will come Friday when the wage component of the Unemployment Report is released. That is what sparked the decline a month ago. Corporations have willingly increased minimum wages and they paid bonuses after the tax cut was passed. The initial "pop" is likely to show up Friday and subside in subsequent months. Wages are the largest input expense for corporations and they are the cornerstone for inflation. The market won't like the number, but wage inflation will settle down after this report. Employment growth will be strong and ADP will post results Wednesday. Initial jobless claims have been declining in the last four weeks and I'm expecting strong numbers. Economic growth has to be robust to shoulder interest rate hikes. ISM manufacturing was solid last week and ISM services will be posted this morning. The soft patch we saw last week (China's PMI and durable goods orders) needs to pass quickly. I believe the economic numbers will be good and growth will not be an issue. The Fed Chairman will testify before Congress today. He said that four rate hikes are possible this year and that almost guarantees tightening on March 31st. The market can shoulder this move if the accompanied by strong economic growth and moderate inflation. Apart from wage inflation, prices are fairly stable. Oil has been dropping and that will take some of the pressure off. Trump might impose tariffs this week and that is also weighing on the market. Swing traders should stay sidelined. This is a low probability trading environment and the market could go either way. We need to let the dust settle and firm support needs to be established. Day traders need to let the market come in this morning. The 100-day MA was tested Friday and it held. If we find support above that level it will be a sign that buyers are lining up there. I would like to buy on support today, but I won’t rush it. If I see a steady drift lower I will stay sidelined. I sense that we will see more selling pressure this week. Wage inflation and a possible trade war will keep buyers at bay. The 100-day MA needs to hold. If it is tested a few times this week it will fail and that would be bearish. We need to see buying above that level for support to form. . .

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