For those of you paying attention to capital markets recently may have noticed that the S&P 500 is hovering around the 1380 mark. Why is this significant and what might happen if it rises or falls significantly from this widely observed support level?
For full disclosure, I wouldn't call myself a technical trader but I do employ technical analysis for purposes of limiting downside risk for some client portfolios. But mostly I am an interested and curious observer of market trends.
Traders have been watching the 1380 level on the S&P 500 for a good reason: It is a significant support level and has been tested several times recently, especially in the trading days following the election. For the novice, a "support level" is just as it sounds; it is a level where prices have recently fallen to but have not significantly fallen through. This means the price is more likely to "bounce" off this level rather than break through it.
There is a certain degree of self-fulfilling prophecy in this regard because the support level is widely known and both individual and institutional traders will sell out of stocks when the support is broken. This selling triggers more selling and can continue until the next support level is reached.
In the past four trading days, the closing price for the S&P 500 has ranged between 1377 and 1382. Many technical traders are looking at the 1375 to 1380 for support.
Hanging in the balance is the fiscal cliff and Eurozone debt crisis. Signs that the worst is over in either or both of these could be just what traders need to jump in at these recent low levels. However, the opposite may also occur.
In summary, my readers know that I do not recommend absolute market timing. However, all investing engages in some form of timing and making slight, tactical adjustments to asset allocation can make sense. This is the basis of my Where to Invest Now series of articles.