Technical Analysis. Weekly Comment. Global. Sell Signal in MSCI World EUR Testing Key Support! Equities Sales Trading Commentary

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1 h Technical Analysis Weekly Comment Equities Sales Trading Commentary Global Michael Riesner Marc Müller 10/04/ Sell Signal in MSCI World EUR Testing Key Support! The EXTEL 2012 survey is live. It is important to us that clients measure the value of our product and our work over the last 12 months. The UBS Equities Technical Analysis team would again greatly appreciate your vote in the EXTEL survey in the Equity Technical Analysis &Charting category. If you have not received an invitation directly from EXTEL, please use this link to access the survey. US Trading: With an increasing number of non confirmations in our indicator work we suggested the US market trading in a final wave 5 and in this context we have been advising against chasing the market higher over the last two weeks. Last week s classic false break in SPX and DJI was the trigger for initial weakness and on the back of the weaker job data on Friday the SPX broke its key support at 1386, which completes a short-term price top and triggers a short-term sell signal with initial support at 1370 and next target at On the sector basis banks have broken our highlighted key support and broker stocks have broken the December bull trend, which completes a classic seasonal top. Cyclical themes continue to underperform, which is inline with our recent comments and although we could see a bounce into later April/early May we expect significant more weakness into at least June/July. US Strategy: Our medium-term view is unchanged. From the early October low we anticipated the SPX to start a corrective rally into late Q1/early Q2 before rolling over into a new correction cycle into the second half of In October we said that into lateq1/early Q2 we could expect a temporary surprise on the upside (break of 1370), but this wouldn t change the underlying picture of expecting a second corrective wave into H2. We think we are currently in a similar situation as in May last year, which was the beginning of a distributive top building phase. In this context we see the current set back as only the first part of a bigger top building process, which should include another bounce attempt into early May before we anticipate significant more weakness into June/July, which from a cyclical perspective remains a very weak time window for risk assets. European Trading: The picture in Europe remains unchanged weak. The periphery continues to be under pressure (IBEX is testing its September low) and the negative sentiment spills over into former outperformer, where the OMX and FTSE are completing major price tops and the DAX is on the way of testing its key support at On a short-term basis Europe is getting increasingly oversold and we wouldn t be surprised to see an oversold bounce starting later this week at the latest next week. However, whereas in the US we are still talking about a top building process we think that that most of Europe will just post a lower high into a late April/early May bounce before we see more pressure coming up into deeper Q2. Inter Market Analysis: The warning signals for risk assets are increasing. Last week the MSCI World has broken its December bull trend, the EURUSD is sitting on key support, whereas the CDS of Spain is re-testing its November high. Into this picture it fits that in US and German bonds we are seeing renewed bullish momentum, which is inline with our cyclical models. Apart form a short-term pull back into early May we continue to see a higher German bund into summer. Record low yields in Germany would be deflationary and in this context we continue to see a negative surprise in risk assets into June/July. Asian Corner: With the February/March breakout in the USDJPY and the impulsive rally in the Nikkei we have seen the beginning of a major trend shift in Japan. However, tactically we have been advising against chasing Japan as both the Nikkei and the JPY have completed a first bullish impulsive wave structure. Inline with this call the Nikkei has started a corrective set back that, apart from a late April/early May bounce, should continue into June/July before starting the next bigger bull leg. NOT FOR DISTRIBUTION INTO THE U.S. UBS 1

2 US Equity Market Update: Chart 1. ) S&P-500 Daily Chart Price Top in Place!! Chart 2. ) Nasdaq Composite Daily Chart Over the last few weeks we have been continuously saying that as long as we do not have a classic price top forming it would be too early to get outright bearish on the US market. Last week SPX and DJI have posted classic false break outs and with the following decline and subsequent break of 1386 the SPX has completed a first price top that however, we see in a similar context as the price tops of February/May and July last year. On a short-term basis we see the US market vulnerable for more downside before we should see a bounce starting into late April/early May that should complete a bigger top building process followed by significant more weakness into deeper Q2. Initial support is at 1370 and a break of this level would suggest a test of On the indicator side our daily trend work remains in short mode, which suggests the risk of more short-term weakness. Again, the major divergence in our daily trend work is the confirmation that SPX and NDX have completed a 5 wave structure, which suggests that, apart from any short-term top building process, the US market has started a bigger and longer lasting corrective cycle. Chart 3. ) VIX Index Daily Chart The same picture applies to the VIX index. In our March 20 weekly report we questioned the sustainability of the low volatility and given the picture on the inter-market side (CDS of Spain and Portugal) we have generally been a believer in a comeback of the sovereign debt crisis in H2. From a pure wave perspective we highlighted the wave 5 structure in the VIX that we saw completing. With the break above 16 the VIX has completed a bigger bottom, which suggests that we are on the way towards our first target at 22. NOT FOR DISTRIBUTION INTO THE U.S. UBS 2

3 US Equity Market Update: Chart 4. ) Russell-2000 Daily Chart After last week s failed attempt to mark a new reaction high the Russsell-2000 has broken its short-term up trend, which completes a price top and which suggests that the broader market measure is in the way towards its early March low at 785, which is a key support. Chart 5. ) BKX Daily Chart Despite the relative breakout of banks versus the SPX, from an absolute standpoint we have been looking for a classic late Q1/early Q2 seasonal top in banks, similar to the tops in 2009, 2010 and With last week s break of our highlighted key support at 49 and the broker dealer index breaking its December bull trend we think this seasonal top is in place, which changes the tactical picture in financials into a selling the rallies mode. Initial support in the XBD is at 97/96 from which we could see a bounce starting into late April/early May. Chart 6. ) BKX Daily Chart Chart 7. ) Broker Dealer Index (XBD) Daily Chart NOT FOR DISTRIBUTION INTO THE U.S. UBS 3

4 US Equity Market Update: More Headwind in Cyclicals!! Since early February we have been highlighting the selective weakness in cyclical themes in the US and in particularly in Europe, where in the meantime the basic resource sector has lost around 15% from its early February top. In the US we have highlighted the major price tops forming in the energy complex and both the OSX and XOI are re-testing or breaking their 200-day moving averages. Generally, on a short-term basis cyclical sectors may look increasingly oversold and in the context of our anticipated overall top building process in the US, it is likely to see an oversold bounce in commodity themes in the second half of April and/or into early May. However, we want to make clear that from a tactical standpoint this potential bounce is probably just playable for short-term traders, as from a cyclical standpoint we continue to see significant more weakness in cyclical sectors/commodity themes into June/July. On the contrary, given the vulnerable set up on the inter-market side (strong USD and the rally in bonds) we can t rule out a negative surprise in risk assets into June/July and if so, then it will be the commodity sectors that will be the most vulnerable via a strong USD. In February we have highlighted the corrective structure of the rebound in US materials. After having completed this classic trend continuation pattern we see more relative weakness coming up in materials, so that from an investment standpoint we would rather use strength to sell instead of playing any oversold bounces. The same message we are getting from US semiconductors and the current set up is very similar as to May last year. Semiconductors are early cyclicals and a major non confirmation between the SOX and the SPX was always a very good early warning indicator for the overall market direction. Chart 8. ) SOX Index Daily Chart Last week the SOX broke its key support at 430, which completes a short-term price top. This is important as it also cements the bigger divergence versus the SPX. Keep in mind, last year the SOX did not confirm the May top in the SPX and it was one of the early indicators for the following summer correction. Today we are in a very similar set up, as the SOX is still trading below last years high, whereas the SPX marginally broke its May Besides all the other non confirmations on the intermarket side, we see the major divergence between the SOX and SPX as just another piece of evidence that H2 will be generally much more challenging for equities as Q1. Chart 9. ) SOX Index versus S&P-500 Chart 10. ) S&P Materials versus S&P-500 x U:XLB (M ate rials )/S&P FROM 9/4/10 TO 9/4/12 DAILY A C B A M J J A S O N D J F M A M J J A S O N D J F M A HIGH / 4/11 LOW / 9/11 LAST Source: Thomson Datastream NOT FOR DISTRIBUTION INTO THE U.S. UBS 4

5 Inter Market Update: Trend Break in MSCI World EUR Testing Key Support Over the last few weeks we have been highlighting the increasing divergences in the equity landscape. Whereas the US market hit a new marginal high early last week we can see that most of Europe has already topped out in early February to mid March. Last week the MSCI World has broken its December bull trend, which we see as the ultimate starting point of a top building process of the equity world including the high weighted US complex. Again, on a very shortterm basis we think we are vulnerable for more downside and a test of the 1263 key support (chart 11.) before a bounce into late April/early May should form either a double top or the right shoulder of a head & shoulder top formation. We are aware of the fact that all this is very anticipative but given the vulnerable set up on the inter-market side we see more the risk of a negative surprise instead of focusing too much on a potentially failed bounce attempt into early May, which in Europe is likely to produce a lower high as the basis for significant more weakness into summer. EUR and Spain Sitting On Key Support In our March 20 weekly report we have highlighted the corrective structure in the 10-year CDS Spain, which has been forming a triangle. In March we said that from a pure pattern standpoint a triangle usually has a trend continuation character and in this context we said it is very likely that into Q2 we will see another move higher, which on the macro side would ultimately suggest a comeback of the sovereign debt problematic in Europe. Chart 11. ) MSCI World Daily Chart Over the last 2 weeks we have seen a big move higher in the 10-year CDS for Spain and it is currently retesting its November high, whereas the 10-year CDS for Portugal is challenging it s January down trend. It s interesting to see that on the inter-market side all this goes hand in hand with the EURUSD testing its key support as well as the IBEX testing its pivotal September low. On a short-term basis we could probably see an oversold bounce in the IBEX and EURUSD but given the patterns and our cyclical models we continue to see more weakness in the EURUSD into summer, which suggests that all these key levels in the CDS Spain, the EURUSD and the IBEX will sooner or later break. Keep in mind, for the IBEX this would means that this market would break its 2002 trend support, which would suggest at least a re-test of the March 2009 low at Chart 12. ) MSCI Europe Daily Chart NOT FOR DISTRIBUTION INTO THE U.S. UBS 5

6 Inter Market Update: Chart 13. ) 10-Year CDS Spain Re-testing its November high!! Apart form a short-term pull back we anticipate a break of the November high and if so, it would increase the down momentum in equities as it would generally suggest a comeback of the European debt crisis. Chart 14. ) 10-Year CDS Portugal With the break of the January down trend we are getting a new tactical long signal for the 10-year CDS for Portugal. Chart 15. ) EURUSD Daily Chart With 1.35 and 1.30 the EURUSD trades between two major breakout levels. Currently the EURUSD is testing its key support, which fits the test of key levels in the IBEX and CDS for Spain. On a short-term basis we could see a bounce but given the whole set up, the patterns and our cyclical models we continue to favour more EUR weakness (USD strength) into deeper Q2, which from a macro perspective would be bearish risk!! Generally, a break of 1.30 would open the door towards 1.26 a short and sharp move lower towards 1.26 and this call remains unchanged as long as we don t see a break of 1.35!! NOT FOR DISTRIBUTION INTO THE U.S. UBS 6

7 Inter Market Update: Chart 16. ) IBEX Weekly Chart With testing its September low the IBEX is testing the 2002 trend support at 7500, which represents a pivotal support. Chart 17. ) FTSE MIB Daily Chart On a short-term basis the FTSE MIB looks increasingly oversold but given the momentum of the move we se more weakness into deeper Q2, which makes it likely to see also in Italy a re-test of the September/December bottom. Chart 18. ) PSI Daily Chart With last week s move down the PSI has broken its November trend support, which resolves a bear flag and has a bearish trend continuation character. Apart from any short-term bounces we anticipate new lows in Portugal into June/July!! NOT FOR DISTRIBUTION INTO THE U.S. UBS 7

8 Asian Corner Update: Nikkei In Corrective Set Back Too Early to Buy! With the February/March breakout in the USDJPY and the impulsive rally in the Nikkei we have seen the beginning of a major long-term trend shift in Japan. The USDJPY has broken its 2007 bear trend and the Nikkei has posted its first major higher low versus the 2008 low, which also from a pattern standpoint forms a potentially bull flag in its monthly chart. However, tactically we have been advising against chasing Japan (March 20 weekly report) as both the Nikkei and the JPY have completed a first bullish impulsive wave structure, which suggested the start of a longer lasting corrective set back scenario. Inline with this call the Nikkei has started to correct and apart from a ( wave b) late April/early May bounce we expect more weakness into the June/July time frame before starting the next bigger bull leg. Conclusion: The structure and patterns remains bullish, whereas tactically it s still too early to buy for the next major upleg. Chart 19. ) Nikkei-225 Daily Chart Chart 21. ) USDJPY Daily Chart Chart 20. ) Nikkei Monthly Chart Chart 22. ) USDJPY Weekly Chart NOT FOR DISTRIBUTION INTO THE U.S. UBS 8

9 European Equity Market Update: Euro Stoxx-50 Testing Key Support Last week was the third consecutive negative week for European equities, which underpins the significant weakness relative to the US market and which has erased almost the entire gains of the Q1 rally leg. Technical damage is increasing across the board and the outright bearish trade of peripheral markets has spread on the Euro Stoxx 50, which has violated its last reaction low. With the German MDAX sitting on a key support (10500), we have the next candidate for a bearish break in the spotlight. Overall, after three bearish weekly candles, the short-term situation in Europe is becoming slightly oversold but given the increasing technical damage, equities have to find a base before we can expect a meaningful bounce. The daily MACD has crossed the 0-level, which is structurally bearish and suggests more weakness and at least a test of the next lower price supports in the period immediately ahead before we can expect a significant late April bounce. Chart 23. ) Euro Stoxx-50 Daily Chart Euro Stoxx 50: A significant break of the last low (2437) is a formal confirmation of the view that European markets are about to top out. Focus is now on the September trend line (2360) and the mid-point of the December/March up leg at Next lower support would be at 2274 (61.8%). Before a bounce becomes realistic, a test of the next lower levels must be taken into account in the period immediately ahead. Former support at 2437 represents now a minor resistance. Chart 24. ) MDAX Daily Chart MDAX: Keep an eye on the German mid Cap segment!! The last extension into the late March high has not been confirmed by the MACD model, which represents a sign of deteriorating momentum. Given the bearish signals in many other headline indices, a break of the November up trend and the last lows at is just a matter of time. A break below on a daily close basis would shift the focus to the early March low at NOT FOR DISTRIBUTION INTO THE U.S. UBS 9

10 European Equity Market Update: Chart 25. ) FTSE-100 Daily Chart FTSE-100: Due to ongoing weakness in energy related themes and most recently in financials, the FTSE settled last week below 5755, which shifts the focus to the next minor support at However, more significant looks the area around the 200 day moving average at 5580 and the 38% retracement of the September/March advance at Chart 26. ) DAX-30 Daily Chart DAX-30: Also the outperforming DAX has not been able to buck the bearish short-term trends in Europe. The violation of the steep November trend support is the first significant negative price signal and the focus is now on the early March low at At around 6500, we have furthermore the 38% retracement of the November/March advance, which defines a short-term price target zone from a where a late April bounce could start. Chart 27. ) Swiss Market Index Daily Chart Swiss Market Index: Thanks to the defensive large caps, the SMI is currently outperforming within Europe. However, from an absolute point of view, the Swiss Market is also retreating and the violation of the August 2011 uptrend line shifts the focus to 6041 and 5966, where the latter represents the 23% retracement of the entire August 2011/March 2012 advance. NOT FOR DISTRIBUTION INTO THE U.S. UBS 10

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