Technical Analysis. Weekly Comment. Global. Europe Underperforming New All-time High in India!! Equities Sales Trading Commentary

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1 h Technical Analysis Weekly Comment Equities Sales Trading Commentary Global Michael Riesner Marc Müller 10/12/ Europe Underperforming New All-time High in India!! US Trading: Last week s pullback was in line with our cyclical road map to see some minor weakness in the first half of December. From a pattern perspective the pullback was corrective, and the SPX has more or less met our pullback target at 1780, which is the last breakout level. With the bullish Friday reversal this level has been confirmed as an important trading support. Given a still very low put/call ratio we wouldn t be surprised to see some more consolidation work this week and/or into next week but our key message remains unchanged that any near-term weakness in the first half December would only be corrective on the way higher into end December/early January. On the downside, the SPX has good support at 1780/1775. On the upside a break of 1813 would call for 1850, which remains our preferred target for a year-end rally. On the sector front the energy complex continues to underperform and has confirmed its relative sell signal. Our focus remains on other cyclical themes, financials, biotech and technology, which has hit a new relative high versus the SPX. US Strategy: Since early September our medium-term view is unchanged. From a cyclical perspective the break of the early August top at 1709 was the game changer for the SPX as this negated an important medium-term cycle peak. From a cyclical aspect, this breakout opened a bullish time window into end December, so that any potential near-term weakness would only be corrective and not touch the underlying bull trend in the SPX. However, we are sticking to our view that from a late December/early January top there is the risk of a 7% to 10% correction into first half Q1, serving as the setup for the next major tactical buying opportunity. European Trading: We have highlighted the increasing selectivity in Europe and the picture remains diverse. On track with our short-term pullback scenario, the DAX has reached our target at 9100, whereas Spain and Italy further underperformed, which caused the Euro Stoxx to undershoot its obvious key support at The real negative surprise is the relative performance where Europe is re-testing its June low versus the US, which means Europe is definitely weaker than we thought. Short-term, there is risk to see more consolidation/down testing into next week but we are sticking to our recent call and expect another bounce from a mid-december trading bottom into year-end/early January and in this context we would use weakness to buy/add. Inter Market Analysis: On track with our cyclical model the US dollar hit an important cycle high in early November, and while trading below the DXY remains bearish-biased into January before we expect a more significant bounce into deeper Q1. With 80.60, the DXY broke another important trading support last week. In EM currencies, we are getting new buy signals in the USDINR and USDBRL, which suggests further EM currency/em market outperformance. Buy Emerging Markets and position for a bounce/rally into January. The picture on the commodity front remains diverse. In late November we highlighted natural gas as a breakout candidate. Over the last 2 week s we have seen a big momentum breakout in NatGas on the upside. Crude oil is bouncing and is on track with our corrective wave B countertrend rally scenario. Gold and metals complex is stabilizing and we can still see a bounce into later December but the underlying momentum remains weak, which suggests further weakness down the road into deeper Q1. Asian Corner: Asia is bouncing relative to the world, which is confirming our bullish bias. The Shanghai Composite is breaking its June 2012 relative down trend and the SSEC is reaching our first target at In Japan the Nikkei has reached its May top at 16000, and on track with our cycle we got a pullback as a setup for the real breakout attempt. Short-term we can see some more consolidation but into January we expect more upside and the break of 16000, which implies a next minor target at The August bottom in EM markets was a major low and in early September we highlighted EM markets breaking out relative to the world. Our key call was to buy India yesterday the NIFTY broke out to a new all-time high, which is bullish and suggests further outperformance into January. NOT FOR DISTRIBUTION INTO THE U.S. UBS 1

2 US Equity Market Update: Chart 1. ) S&P-500 Daily Chart Chart 2. ) December Seasonal Chart S&P-500 Chart 3. ) Dow Jones Industrials Daily Chart Still Constructive!! On the back of our cyclical model we have been looking for a minor pullback into first half December before starting the next bounce into year-end and/or into early January to reach new highs. After the November breakout the US market was overbought, the sentiment has hit extreme levels, selectivity was increasing, and in our indicator work we had a first momentum divergence, which was the setup for last week s pullback. After a 5-session pullback the SPX has more or less reached our preferred target at 1775, which is the last breakout level in the SPX and with last week s bullish Friday reversal this pullback basis has been confirmed, which makes 1780/1775 a more important trading support. With a new buy signal in our daily momentum the market is actually in a good position to start a breakout attempt. However, from a cyclical aspect it would actually be a little bit too early to already see the next breakout starting, and the sentiment remains worrying. Despite last week s pullback we did not see any kind of impact in terms of increasing hedging activity. On the contrary: the 5-day CBOE put/call ratio remains at very low levels and is therefore still at contrarian levels, which is suspicious and implies that we could see some more consolidation work and a second pullback leg into later this week and/or next week before starting the next real bout attempt. Conclusion: The bullish Friday candle is impressive and the rally underpins the underlying bullish bias of the market. Furthermore, over the last two weeks we highlighted the recent high momentum tops in the SPX, in the DJI, and in other key sectors. No bull market and very few rallies end up in a high momentum top and without forming any kind of distributive top formation. All this is still missing in the SPX/NDX and DJI, which suggests that there is still something missing on the upside and in this context we expect to see at least one more rally/bounce leg into year-end/early January before we may indeed see a bigger tactical divergence forming in our daily trend work as a real warning signal that we are on the way into a more important top. On the downside the SPX has good support at 1780/1775. On the upside a break of 1813 would call for 1850, which remains our preferred target for a year-end rally. On the sector front the energy complex continues to underperform, whereas our focus remains on other cyclical themes, financials, biotech, and technology, which has hit a new relative high versus the SPX. NOT FOR DISTRIBUTION INTO THE U.S. UBS 2

3 US Equity Market Update: Chart 4. ) S&P-500 with CBOE 5-Day Put/Call Ratio The 5-Day CBOE Put/Call ratio is still at very low levels and has not reacted on last week s 5-day pullback, which is suspicious. On the one hand it is a factor that supports our thesis to see more near-term consolidation work nearterm into ideally next week before starting the next real breakout leg into year-end but the very low level is also a clear indication that we are on the way into a more important tactical top in the next few weeks. Chart 5. ) Broker Dealer Index (XBD) Daily Chart Financials Still Bullish Biased Chart 6. ) BKX Daily Chart Last week we highlighted the energy complex, where we got a significant relative short signal versus the SPX. Energy stocks continued to underperform, whereas our focus remains on most other cyclical sectors (materials, CYC, consumer discretionary), financials, biotech, and technology, where the Nasdaq Composite has hit a new relative high versus the SPX. Again, in most of the cyclical themes and in financials the last reaction high represents a high momentum top, which from an Elliott wave perspective is usually the top of a wave 3. If this count and view is correct then we currently see a corrective wave 4 pullback in the broker dealer index and in the banking index, where a final wave 5 would still be missing to complete a bigger degree bull cycle. Conclusion: Regardless of how complex any kind of short-term consolidation pattern gets, we think that there is still something missing on the upside in financials, although at the end of the day this potential move could send us into a more important tactical top followed by a significant setback into deeper Q1. NOT FOR DISTRIBUTION INTO THE U.S. UBS 3

4 US Equity Market Update: Chart 7. ) Nasdaq Composite Daily Chart Technology Still Strong In last week s report we highlighted the fresh relative breakout of the Nasdaq Composite versus the SPX, and with semiconductors hitting a new high and new highs in other key stocks we saw further relative strength in the technology camp. On a short-term basis the Nasdaq Composite looks overbought and with trading at the upper end of its bull trend channel we think, a) in absolute terms the upside should be limited and, b) we wouldn t be surprised to see a short-term pullback. However, as long as we don t have any sign of a distributive top formation forming the technology segment remains bullish biased and in this context we expect to see more outperformance into at least early January. Chart 8. ) Nasdaq Composite versus S&P NASCOMP/S&PCOMP~U$ D J F M A M J J A S O N D J F M A M J J A S O N D Chart 9. ) Housing Index (HGX) Daily Chart Source: Thomson Reuters Datastream Housing as a Breakout Candidate!! Keep an eye on the housing sector. The sector was our key short call in the US, particularly during the summer where we have been bearish on the bond market. Since September and the bond market stabilizing/bouncing, the housing sector has been trading in relative small trading range, which is forming a classic triangle. The ADX indicator as a trend momentum measuring tool is approaching extreme low levels, which obvious signals a trendless phase in the housing sector. However, our regular readers know that we are using the ADX as a contrarian indicator, which means if the ADX is at very low levels we are not too far from a next breakout and subsequent trend move. The breakout levels in the HGX are at 192 and 178. We would buy/sell a break of either of these levels and/or establish a volatility breakout strategy since it is very likely to see a trend move in housing stocks into Q1. NOT FOR DISTRIBUTION INTO THE U.S. UBS 4

5 Inter Market Update: DXY Remains Bearish Biased Watch EM Currencies! The July top in the US Dollar was a major top and on track with our cyclical model and our corrective October rebound scenario the US dollar has hit another important lower cycle high in early November at 81.48, which is new pivotal resistance and underpins the underlying bearish character in the US dollar. From a pure cyclical perspective the DXY remains bearish biased into late December/first half January before we expect the US dollar starting a more significant bounce into deeper Q1. With the DXY has broken another important trading support last week, which opens the way towards (62% retracement of the October/November rebound). A break of would generally call for a re-test of the October low at 79. Keep an eye on Emerging Market currencies. In early September we highlighted the August bottom in the Emerging Market complex as a major low and in this context we highlighted the August tops in USDINR and USDBRL as key levels and the basis for significant recovery moves in EM currencies. Similar to the EUR, the last bounce into early November resulted in a lower high in the USDINR, which is generally a bearish setup for the USD. With the new down leg the pair is testing its key support at 61. A break would be further bullish for the Rupee and imply a move down towards 58 into January before, from a cyclical perspective we expect a more import tactical bottom forming as the basis for a big US dollar rebound into deeper Q1. A similar picture/set up we have in the USDBRL. Although the pair has been underperforming recently, the current setup is appealing and speaks for a new down leg in USDBRL. The recent new high in the USDBRL was a low Chart 10. ) DXY Daily Chart momentum high, forming a classic non-confirmation in our daily momentum work, which is a bearish setup for the US Dollar. The short-term uptrend is at A break of this level would call for a re-test of the October bottom at Conclusion: With last week s break of in the DXY the underlying bias for the US dollar remains bearish. However, it is the setup in Emerging Market currencies that is particularly appealing and implies further outperformance of Emerging Markets versus the MSCI World short-term, into minimum January before we see a more significant tactical setback starting in the EM world into deeper Q1. Chart 11. ) USDBRL Daily Chart Chart 12. ) USDINR Daily Chart NOT FOR DISTRIBUTION INTO THE U.S. UBS 5

6 Inter Market Update: Chart 13. ) MSCI EM Asia versus MSCI World MSCI EM Asia vs. MSCI World (USD) Watch Emerging Markets!! The October relative pull back in Emerging Markets was significant but we still see it as part of a relative bottom versus the MSCI World and n particularly Emerging Asia looks appealing with gaining relative strength, which could bring up a classic double bottom speculation relative to the world D J F M A M J J A S O N D J F M A M J J A S O N D Chart 14. ) MSCI Emerging Market Daily Chart Source: Thomson Reuters Datastream The October pull back in the MSCI Emerging Market has a corrective character and from a pattern standpoint a triangle formation has been forming over the last few weeks. Last week the index has successfully confirmed its 200-day moving average, which is appealing. A break of the short-term downtrend at 1020 would be bullish and imply a more significant rally leg to 1050 (October top) and 1080, which is the January top. Buy Emerging Markets!! Chart 15. ) BOVESPA Daily Chart The recent set back in the BOVESPA was significant but with forming a 3 wave pattern the set back has nonetheless still a corrective character, which is underlying bullish and suggests that a higher low versus the July low is forming. With the recent reaction low the BOVESA has tested the 50% retracement of the July/October rally at In our fast momentum indicators we have a bullish divergence forming, which is a bullish trading setup. We would buy the BOVESPA and position for a bounce/rally into January. NOT FOR DISTRIBUTION INTO THE U.S. UBS 6

7 Inter Market Update: Momentum Breakout in NatGas Crude Oil Bouncing! The picture on the commodity front remains very diverse, and given the weak trend in the US dollar the performance in commodities and in particular the metals area is at the end of the day very disappointing. Keep in mind, if gold is unable to really profit from a weaker US dollar, what happens to gold if we are correct and we get a big bounce in the US dollar from a potential January bottom into deeper Q1 as a reflection of a potential tactical risk-off scenario. Although on a shortterm basis we continue to see the chance for a limited bounce in gold and other metals, from a cross asset class perspective the currency side will be another threat for gold into deeper Q1 and it unfortunately confirms the underlying weak patterns in the yellow metal that we have been highlighting since the August rebound top. In our November 11 th weekly report we highlighted Natural Gas as a breakout candidate and therefore also as a reality check for the overall commodity landscape. In mid November we said that while trading in the range of 3.85 and 3.40 NatGas would be in a neutral position but given the very low ADX indicator it was very likely to see a big trend move and therefore a major breakout starting very soon, which we saw it as a trend setter for the overall commodity landscape. In late November we saw the break of the key resistance at 3.85, which was just the beginning of a big and impulsive trend move. Short-term NatGas is overbought and take a breather but given the big momentum we can expect more near-term strength and therefore a test of the April high at A break would call for a continuation towards Chart 16. ) Natural Gas Daily Chart Last week we saw a significant bounce in crude oil. With the break of $96, crude completed a small trading bottom, which means the test of the 2012 long-term trend support was finally successful, and is in line with our recent call. Crude oil was oversold. The sentiment towards oil was very bearish. We had a small non-confirmation in our daily momentum work and from a cyclical perspective we have been looking for a bounce into December. However, we reiterate our view/call and see the current bounce as just a countertrend move (wave b) as part of a bigger corrective (a-b-c) correction pattern. So at the end of the day the current bounce should also just be corrective and limited on the upside. We have resistance at $98 (200-day moving average) and $100/101. Chart 17. ) Crude Oil Daily Chart Chart 18. ) Gold Daily Chart NOT FOR DISTRIBUTION INTO THE U.S. UBS 7

8 Asian Corner Update: China Outperforming Nikkei Remains Bullish Biased After the October set back we called a tactical bottom in Asia/China in mid November and given the constructive patterns (multi month bull flags in SSEC and HSCE) we anticipated significant breakouts/bull legs into finally December. From a relative perspective the SSEC has successfully tested its summer low versus the MSCI World and with the current outperformance leg the market is breaking its 2012 long-term underperformance trend versus the MSCI World. In absolute terms the SSEC is on the way of reaching our initial target at Short-term we can see some consolidation but our bias into late December and into early January remains bullish. A break of 2270 would call for an expansion of the November rally towards 2385 to The HSCE is trading in a potential bull flag with breakout resistance at Another breakout would open the door towards to After the record high overbought stance in May we have been looking for a multi month corrective process into early Q4 as the next major tactical buying opportunity in an intact underlying bull market in Japan. After the successful breakout in early November the Nikkei has reached its May top at 16000, and on track with our cycle we got a pullback as a setup for the real breakout attempt. Short-term we can see some more consolidation but into January we expect more upside and the break of 16000, which implies a next minor target at Chart 19. ) Shanghai Composite (SSEC) Daily Chart Chart 21. ) Hang Seng CE Index Daily Chart Chart 20. ) SSEC versus MSCI World Chart 22. ) Nikkei-225 Daily Chart NOT FOR DISTRIBUTION INTO THE U.S. UBS 8

9 Asian Corner Update: New All Time High and Relative Breakout in India!! The August bottom in EM markets was a major low and in early September we highlighted Emerging Markets breaking out relative to the world. One of our key calls in September (September 10 th weekly report) was to buy India and one of our arguments behind this call was the fact that in the bigger picture the NIFTY was not far away from a major breakout to a new all time high, which was and still is a big misfit to the underlying bearish or too cautious sentiment towards India and Emerging Markets. Who would have thought that yesterday the NIFTY broke out to a new all-time high and it is in particularly the pattern in absolute and relative terms, which is appealing for India. Relative to the MSCI World India is about to complete a major inverted head & shoulder formation, which implies more outperformance down the road. In absolute terms the 2011/2012 corrective cycle and the correction leg last year can be interpreted as a huge Cup and Handle pattern. Again from a sentiment standpoint the current breakout to a new all time high does not really trigger any euphoria and/or any sentiment spike. On the contrary; we think the sentiment and news flow towards India is still very cautious, which actually does not fit a new all time high, and which at the end of the day is a very healthy environment to see more outperformance. Conclusion: The last set back into November has produced the anticipated higher low as a new tactical buying opportunity and from a pure cyclical perspective the November low at 5970 also represents a new pivotal support for the NIFTY. So as long as the market trades above this level, the underlying Chart 23 ) NIFTY Daily Chart technical picture remains bullish and this is also important for the current breakout scenario. Short-term the NIFTY is overbought and we can see a pull back, which could bring up the discussion about a false breakout, which is consequence would be bearish. This kind of signal we would ultimately only get with a break of 5970 and as long as this is not the case we remains bullish biased for this market. On the contrary; given the relative buy signal versus the MSCI World, the underlying sentiment and the huge Cup and Handle pattern we see India as a potential overshooting candidate into Into January we expect a test of 7000 as a next target projection. Cyclically we should also see in India a bigger tactical set back into mid Q1 but into summer next year we could see a move towards We reiterate our call to buy/add India into weakness! Chart 24. ) NIFTY Weekly Chart Chart 25. ) BSE-100 versus MSCI World India BSE 100/MSCI World relative breakout underway S S D J F M A M J J A S O N D J F M A M J J A S O N D H Source: Thomson Reuters Datastream NOT FOR DISTRIBUTION INTO THE U.S. UBS 9

10 European Equity Market Update: Europe testing It s Summer Low versus the US We have highlighted the increasing selectivity in Europe and the picture remains diverse. On track with our short-term pullback scenario, the DAX has reached our target at 9100, whereas Spain and Italy further underperformed, which caused the Euro Stoxx to undershoot its obvious key support at The real negative surprise is the relative performance where Europe is re-testing its June low versus the US, which means Europe is definitely weaker than we thought. Short-term, there is risk to see more consolidation/down testing into next week but we are sticking to our recent call and expect another bounce from a mid-december trading bottom into year-end/early January and in this context we would use weakness to buy/add selectively in the relative strong markets such as DAX, AEX, OMX, whereas a Swiss Market Index we only expect to post a lower high into January due to the headwind from the currency side, where the CHF is simply too strong. Chart 26. ) Euro Stoxx 50 Daily Chart Chart 27. ) STOXX-600 versus S&P-500 Euro Stoxx 50: Most significant was last week s aggressive underperformance of Europe versus US equities and the result was a stronger than favored pullback in most European indices. It took just 4 sessions to wipe out the low momentum advance of the previous six weeks in the STOXX Europe 600. The Euro Stoxx 50 slipped below the important support at 3000 and stabilized at the 23% retracement of the June advance at 2960 on Friday. With the short-term situation looking oversold this week should see stabilization work and we maybe need to see more bottoming before the expected advance into year-end can start. In terms of price, it remains to be seen if we get an immediate re-break above 3000 on a daily close basis, which is required to generate an improving price signal. As long as this is not the case the risk is further bottoming or another limited downside test into next week, which represents a tactical buying opportunity for trading accounts into year-end. However, the real negative surprise is the relative weakness of Europe versus the US market. In August we have highlighted the break of the 2013 relative underperformance trend as the beginning of a potential major and long-term relative trend change in the relative performance of Europe versus the US. With yesterday s closing Europe is testing its relative summer bottom, which is definitely weaker than expected. What are the consequences of this negative surprise? A new low in the relative performance of Europe versus the US would be definitely a negative surprise but we actually expect the broken 2013 underperformance trend to support Europe versus the US, which means we do not expect the break to be sustainable and therefore we do not see it as a general game changer for European markets. NOT FOR DISTRIBUTION INTO THE U.S. UBS 10

11 European Equity Market Update: Chart 28. ) FTSE-100 Daily Chart Chart 29. ) DAX-30 Daily Chart Chart 30. ) Swiss Market Index Daily Chart FTSE-100: In the FTSE, the 200-day moving average has proved to offer support. The question is if a sustainable trading low is already in place. The last major reversals have undershot the 200 day moving average, which means that the risk is potentially one final washout before starting another up leg in the second half of December. The structural support defined by the last low at 6317 is currently not at risk. Minor resistance is at Overall, even if we were to see one more downside test this week below the 200 day moving average, further weakness would represent a tactical buying opportunity with regard to a stronger second month half. DAX-30: Last week we have highlighted the overbought position of the German market in absolute and relative terms and inline with our cyclical road map we saw the anticipated pull back of the market. However, with last week s Friday low the market has already hit our mid December pull back target at Conclusion: From a pattern point of view and following our cyclical road map by expecting a low in mid December we cannot rule out seeing a classic a-b-c pattern developing so that a bounce early this week could represent a counter trend wave b followed by a final pull back into next week towards 9000/8981. Nonetheless, we reiterate our recent call that from a cyclical perspective we continue to see another up leg during the second half of December and into early January so that more near term weakness represents a tactical buying opportunity into year-end with our target zone unchanged at 9500/9700. Swiss Market Index: Inline with our last week call the Swiss market traded more or less hand in hand with the rest of Europe and with the majority of the single stocks pulling back. On the index front, we have been looking for a pullback towards the 200 day moving average, which is now coming up at coinciding with the 38% retracement of the entire advance off from the June low. The last significant low at 7747 is in our view not at risk, so that further short-term weakness should be limited and in line with our overall market call we also expect the Swiss market bouncing into end December and/or early January. However, given the relative weakness (too strong CHF) it is increasingly likely to see a lower high into January before starting a more significant set back into deeper Q1. NOT FOR DISTRIBUTION INTO THE U.S. UBS 11

12 STOXX Europe 600 Index Sector Overview: NOT FOR DISTRIBUTION INTO THE U.S. UBS 12

13 Weekly Technical Indicators: (Source: Pinnacle Data, Datastream) Charts: Metastock NOT FOR DISTRIBUTION INTO THE U.S. UBS 13

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