Downtrend Arrested In U.S. Equities?

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 |  Includes: DIA, QQQ, SPY
by: Prieur du Plessis

My notes below are somewhat cryptic as I am about to leave for abroad. However, the graphs should provide some food for thought regarding the short-term outlook for U.S. stocks.

Monday’s rally in the S&P 500 was mainly as a result of the PE10 closing the discount that opened the VIX last week.

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The rally took the PE10 to 19.95 from 19.39 last Friday.

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The PE10 remains under the 40-day moving average, with the latter topping out. I will not be surprised to see the 40-day moving average tested at 20.40 soon.

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The PE10 is oversold but the RSI is still trending down. An unchanged to higher closing of the S&P 500 over the next three days is likely to break the RSI downtrend.

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Both the 12-day and 26-day exponential moving averages of the PE10 are bottoming.

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The MACD (26;12) of the PE10 is showing signs of bottoming. The nine-day moving average of the MACD is still trending down while the gap between it and the MACD indicates that a longer-term buying signal is still some way off.

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The VIX is testing support levels around 32.

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The RSI of the VIX has retreated somewhat from mildly overbought conditions but remains above the downtrend established in August.

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The VIX is currently testing the 12-day and 26-day exponential moving averages.

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The MACD (26;12) is slowly rolling over and the gap to its nine-day moving average (VIX Signal) is closing slightly.

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The VIX MACD and the signal are a better indicator of PE trend changes than those of the PE10. The closing of the VIX’s MACD and the signal indicates that a buy signal could be imminent.

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The RSI of the PE10 and the VIX (inverse) combined has tested the range of previous oversold levels. Although the RSI is still trending downwards, unchanged S&P 500 and VIX levels over the next three days will break the downtrend.

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A break in the downtrend of the combined RSI is likely to lead to a significant rally in the S&P 500.

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