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.
Click on any chart below to enlarge:
The rally took the PE10 to 19.95 from 19.39 last Friday.
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.
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.
Both the 12-day and 26-day exponential moving averages of the PE10 are bottoming.
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.
The VIX is testing support levels around 32.
The RSI of the VIX has retreated somewhat from mildly overbought conditions but remains above the downtrend established in August.
The VIX is currently testing the 12-day and 26-day exponential moving averages.
The MACD (26;12) is slowly rolling over and the gap to its nine-day moving average (VIX Signal) is closing slightly.
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.
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.
A break in the downtrend of the combined RSI is likely to lead to a significant rally in the S&P 500.