3 Reasons Why This Could Be a Big Week for Stocks

If you’ve been riding the stock market roller coaster of the last few months, you probably want off. Unlike the coasters at Six Flags or Disneyworld, this one doesn’t leave you smiling when it takes your money…

But that could be about to change — after all, it’s shaping up to be a big week for stocks.

It’s no secret that Mr. Market has been a bit schizophrenic for the last few months. Stocks have exhibited wild swings in both directions, providing ample opportunities for traders on both sides of the market to get nailed with losses. And by and large, that’s exactly what’s been happening to professionals and amateurs alike:

Citigroup, Bank of America, and MF Global are three firms that have reported major (and in one case, catastrophic) trading losses in the third quarter of 2011. When the pros are hemorrhaging cash, you know retail investors are hurting too…

Fear remains high right now: as I type, the VIX Index (a sort of “fear gauge” for stocks) remains above 30. That tells us that investors are still very anxious about the market.

Don’t fall for the fear mentality that the crowd is currently falling victim to. There are three reasons why this could be a big week for stocks — and why you shouldn’t bow out just yet.

1. A Throwback in the S&P 500

Something big happened the week before last: the S&P 500 Index broke out above the 1,225 resistance level that had been acting as a sort of “price ceiling” for shares. That was a significant move because it told traders that buyers had enough strength to push stocks through a range where there had previously been an abundance of sellers.

And while stocks pulled back last week, where they ended up is pretty significant. Take a look at this chart for a more visual interpretation:

Last Monday and Tuesday’s big red bars shoved the S&P 500 index back to that 1,225 level that I mentioned before. It’s a technical formation called a throwback, and while it looks scary, it’s actually a good thing for investors to see.

That’s because it confirms the strength of our former resistance level (now a support level), at 1,225. It also tells us that there’s a glut of demand for stocks below that price in the broad market. Earnings continue to be one of the biggest safety nets for stocks right now — as long as corporate numbers continue to best expectations, expect the S&P to hit a bid at 1,225.

Stocks could springboard off of that price level this week…

2. Stock Indexes Approaching Breakeven

Another important factor for a rally this week is the fact that all of the major indexes are sitting within a hair’s breadth of breakeven for 2011. From the start of January through this morning’s open, the S&P is down just 0.35%. The NASDAQ Composite is similarly up only 1.25%.

The fact that investors are so close to being in the black again could provide some added psychological justification for shoving shares higher. Seeing “total returns in 2011” tick from red to green on retail investors’ brokerage accounts is likely to convince some investors that we’ve turned a corner from the market’s lows. It’s as simple as that.

3. European Resolution

Finally, there’s Europe. There’s no doubt that Europe has been the driver for U.S. stock prices for the last six months or so — the resurgence of the PIIGS debt debacle has been threatening to crash stocks every single day. But there’s hope that we could see that change…

Last week, Greek Prime Minister George Papandreou single-handedly crashed the stock market when he called for a referendum on his country’s best bet at avoiding default and staying in the EU. Since then, that decision has drawn serious fire from other Greek politicians — and the potential that Italian Prime Minister Berlusconi may step down ahead of budget talks makes reaching a workable plan possible this week.

While I’m sure that we’re still a long way of from fully figuring out how to deal with Europe’s debt problems, a step in the right direction this week is a big factor that could help a rally.

To take advantage, I’d recommend waiting for the next strong day in the S&P (Mr. Market’s looking a little bit tepid today) before taking a position in stocks. We want to see the throwback in stocks lead to a more definitive bounce before being buyers…