The key resistance 200dma

The S&P 500 is near the key long term resistance – 200 day moving average. Is this the time to short, or to buy the eventual breakout?


The Bear case

The bear case is simple, the S&P 500 is currently in a bear market rally, since the bottom reached on March 23rd. The US economy is in a recession, mostly due to the impact of the Covid-19 lockdown, and all indications point that there will be a second wave of rising infections. Thus, the recession still has no end in sight, and the worst is likely still ahead of us, globally. The vaccine will eventually be available, but not in time to prevent the likely second wave of infections this coming fall. In addition, the trend of de-globalization is only accelerating, and the US is facing a political uncertainty leading into the November election. Thus, the bear market is likely to continue.

The Bull case

The 200dma breakout can be very powerful and take the S&P 500 to the new all-time highs. The bull case rests on a 1) miracle drug that cures Covid-19, 2) vaccine available in a few months, 3) the Fed put, or simply a determined Fed that does not allow the bear market to continue, 4) the Fiscal put, or another round of fiscal stimulus that bridges the heath crisis, 5) optimism  that the partial reopening will lead to the V-shaped economic recovery, and finally, 6) trend following by the quants combined with short covering.

Likely resolution

Fundamentally, the bear market is likely to continue, and the 200dma resistance technically could be the turning point. However, one should not underestimate the power of trend-following and definitely consider the mantra “don’t fight the Fed”.