Battle Being Waged at 700

March 5, 2009 4:00PM

To the surprise of many smart money investors, a multitude of casual investors don’t know about the considerable force affecting the stock market every day known as technical trading.

Technical analysis involves evaluating securities using past price and volume history. Using technical indicators like support and resistance, technicians execute buy and sell orders regardless of a security’s intrinsic value.

With equity prices falling like a meteor, technicians have been actively watching to see if technical support levels will hold as fundamentals fail. Considering that the market is firmly entrenched in a bear market, support levels have been the focus of technical traders of late. Support is a specified price level that a security struggles to fall below due to the entrance of technical buyers.

Support and resistance points are usually near values that had previously seen a reversal. In the case of a support line, it is usually a value in which the price dropped near the specified level, and then an influx of buyers (accompanied by strong volume) helped the security bounce higher.

Many technical traders had previously focused on the Dow and its support levels, but the trend has been to increasingly target the broader S&P.

On Tuesday, technicians waged a war at 700 on the S&P 500. The index waffled above and below the 700 mark multiple times before settling lower at 696. On Monday, the S&P flirted with falling below 700, finally settling right at the key inflection point. The Dow had previously surrendered the 7,000 mark easily on March 2nd.

Bearish macro data and putrid auto sales released on Tuesday would seem to have been enough to send indices tumbling. General Motors (GM) reported a 53% decline in U.S. sales during February, Ford (F) realized a 48% fall, Chyrsler saw a 44% drop, and Toyota sales tumbled 40%. Earlier in the session, the National Association of Realtors revealed January pending home sales fell a sharp 7.7% month-over-month.

With the S&P surrendering 700, tomorrow’s session will be of increased importance. If the market forges lower, technicians will revise down their next expected support level, adding to bearish sentiment.