If stocks fall below the ‘Mendoza line,’ watch out!

Stocks are enjoying a strong Wednesday, with the S&P 500 rising to levels not seen since the sharp mid-August decline. And the key now, says one trader, is for the large-cap index to stay above a critical level.

With the S&P near 2,080, "I'd look at 2,000 as your bull/bear line on the downside," said Phillip Streible, senior market strategist with RJO Futures.

While round-number analysis can sometimes seem a simplistic or even silly way of looking at stocks, levels like 2,000 can truly matter as long as sufficient weight is attached to them.

"It seems like a lot of people are using that number as a benchmark," Streible said. "People will say, 'Hey, the world's good, we're over 2,000,' or 'Buy the 2,000 puts — if we go below there, we're going to hell in a handbasket!"

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That is, in order to get protection on stocks, individuals will simply buy a position that will show returns if the S&P 500 falls below 2,000 within a given time frame. Indeed, the put contract expiring in December with a strike price of 2,000 is the most widely held option expiring in 2015, and can currently be purchased for about 1 percent of the price of the index.

The thought among those trading stocks that such a critical level exists actually has a parallel in America's other favorite pastime: Baseball.

Mario Mendoza, a shortstop who played for the Pittsburgh Pirates, Seattle Mariners and Texas Rangers in the 1970s and early 1980s, was known as a good fielder but weak hitter. With a career average batting average of .215, he struggled to stay about .200. This figure has become known as the batting average separating decent hitting (such as would allow a manager to keep an excellent fielder in a lineup) from true offensive incompetence.

Even though the average batting average varies from year to year and from team to team, if a hitter falls below the so-called Mendoza line of .200, he is generally in trouble.

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Similarly, the 2,000 level on the S&P is where market participants will change their minds about stocks, determining that they are in bad shape — which threatens to become a self-fulfilling prophesy that will lead to the actual acceleration of losses, said Streible.

"That is the level we keep testing," he said in a Tuesday "Trading Nation" segment. "If we come back below 2,000, the market should continue going lower."

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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