Technical Analysis. Weekly Comment. Global New Key Support in SPX Europe in Wave 5. Equities Sales Trading Commentary

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1 h Technical Analysis Weekly Comment Equities Sales Trading Commentary Global Michael Riesner Marc Müller 15/10/ New Key Support in SPX Europe in Wave 5 US Trading: Short-term we have been looking for a pullback into an early October minor low as the basis for a bounce into mid-october before seeing another corrective setback into late October/first half November. On the back of the continued weakness in mega caps the DJI and SPX have been struggling to find a tradable low and last week s Tuesday sell-off finally was a classic washout that produced bear traps in the NDX, Russell-2000, and the banking sector. However, most of the outperforming cyclical sectors have been defending their key levels; the DJI and staples staged a bullish reversal on their 200-day moving average, and the transport sector defended its June bull trend, which means that last week s reaction low in the SPX at 1646 represents a new key support. Although our minor trading low came in a few days later this does not change our short-term view. Last week s 1646 trading low in the SPX is the basis for a short but limited bounce into best case next week before we should see another tactical down leg starting into finally first half November. On the upside we can still see a re-test and/or marginal break of the September high, but given the high number of non-confirmations in our indicator work, the broader market being overbought and the underlying weakness in mega caps we do not expect a new broad-based breakout near-term. We are sticking to our recent calls and anticipate a setback towards 1627 to 1600 into first half November before starting another rally into year end. US Strategy: Our medium-term view is unchanged. From a cyclical perspective the break of 1709 was a game changer for the SPX as this negates the early August top as an important medium-term cycle top. From a cyclical aspect, the break of 1709 opens a bullish time window into end December, which suggests that any potential nearterm weakness/setback into early November should 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 more significant correction into deeper Q1 serving as the setup for the next major tactical buying opportunity. European Trading: Last week we said that while trading above 2877 we can still expect new highs in the Euro Stoxx into mid October before seeing a set back into first half November and the increasing selectivity in Europe we see in fact as a leading indicator for a near-term trading top. Whereas in the underperforming markets (SMI, FTSE-100, AEX, OMX and OBX) we have seen initial set backs and this caused a break of the June bull trend in the STOXX-600 we see the rally in the outperforming periphery getting increasingly exhaustive. On the upside the Euro Stoxx remains limited at 3000 to best case 3070 into next week. Into first half November we anticipate a pull back to 2850 and worst case 2800 before starting a next rally leg into year end. With the sentiment in Europe reaching extreme levels we wouldn t be too aggressive in chasing the markets at current levels. In July we highlighted the IBEX breaking its 2009 underperformance trend versus core Europe, and in August we confirmed the relative breakout of Europe versus the US as just the beginning of a major trend reversal. In the meantime we have seen aggressive rallies in the periphery and the break of the 2007 bear trend in the IBEX and the break of in the FTSE MIB represents a long-term buy signal. Short-term, the periphery is pretty much overbought and we expect a corrective setback but no bull market ends with a high momentum top, which suggests any tactical weakness will be a buying opportunity for more upside into later this year and into next year. Inter Market Analysis: The lower September reaction high in the DXY has confirmed the July top as a major US dollar top. Short-term, the US dollar is oversold and a break of would imply that a bounce is underway. However, any near-term dollar strength we see limited into late October/early November before starting its next down leg into year end. Gold is weak and testing its 1273 key support. A break of 1273 would be short-term negative and imply that a retest of the June low at 1180 is underway. However, we are sticking to our recent calls and continue to see at least one more bounce leg into deeper December before seeing a tactical negative surprise into Q1, but as long as we don t see a break of 1320 it is too early to get tactically bullish on gold. NOT FOR DISTRIBUTION INTO THE U.S. UBS 1

2 US Equity Market Update: Key Support at 1646 Upside Limited!! From a cyclical perspective we expected the September pullback to move into an early October minor low and this trading bottom should be the basis for another short and limited bounce into mid-october before seeing more weakness into first half November as the next bigger tactical buy setup for a year-end rally. With the continued weakness in mega caps it was difficult to identify a real and tradable low in the SPX and DJI, and at the end of the day it was last week s washout that produced bear traps in the Nasdaq Composite, the Russell-2000, and US banks (which marginally broke their 2011 bull trend) as the basis for the following bounce. However, most of the outperforming cyclical sectors (OSX, materials, SOX) defended their key supports, the Dow Jones Industrials and the staples sector (that has been weighing on the market) posted a significant bullish reversal on their 200-day moving averages and together with the transport sector confirming its June trend support we have evidence that last week s reaction low at 1646 finally represents our anticipated early October low instead of last week s highlighted 1670 level. What does this mean for our tactical trading? Although our anticipated early October minor low came in a few days later than expected it leaves our tactical roadmap unchanged. From a cyclical perspective we continue to see the current bounce limited into later this week and best case next week before we see another setback starting. However, given the fact that our minor trading low came in a few days later we also see the risk that our the next more important tactical bottom shifts more into mid-november instead of our previously anticipated early November low. Given the underlying weakness in mega caps and the recent relative weakness in banks we think it will be difficult for the SPX, DJI, and BKX to mark a new reaction high into next week, whereas the outperforming cyclical sectors (energy, materials, CYC, and semiconductors), the broader market (Rrussell-2000) and transport could still hit new highs. Moreover, with last week s wash out it is difficult to see the SPX still trading in a rising wedge, whereas in transport we still have an idealized wedge pattern forming, which suggests the risk of a setback into first half November. On the indicator side the picture is unchanged. We still have a significant number of non-confirmations in place. The market breadth topped out in May. In September we had a big non-confirmation in the VIX index and several other indicators versus the new high in the SPX and it was the main reason why we did not believe in a sustainable breakout in September and we warned about chasing the market too aggressively. This setup has not changed and together with the outperforming broader market (Russell-2000) getting increasingly overbought/toppish we are sticking to our recent comments and continue to see the risk of a short-term setback into first half November before resuming the underlying bull trend and start another rally/bounce into year end. Conclusion: Last week s reaction low at 1646 represents a new pivotal support. As long as the SPX trades above this level the market remains per definition in tactical bounce mode, whereas a break of 1646 would be bearish short-term and imply more weakness into first half November. On the upside we see the SPX capped at 1710 to Our price target into November is unchanged at 1627 to 1600, from where we expect the market to start another tactical rally into year end. Chart 1. ) S&P-500 Daily Chart Chart 2 ) Dow Jones Industry Daily Chart NOT FOR DISTRIBUTION INTO THE U.S. UBS 2

3 US Equity Market Update: Chart 3. ) S&P-500 with NYSE McClellan Oscillator Chart 4. ) Dow Jones Transport Daily Chart Over the last two weeks we said that into mid-october we could still see a marginal new high in the SPX, which from a pattern standpoint could complete a rising wedge and in our indicator setup this potential marginal new high would bring us just another bearish divergence in the NYSE McClellan Oscillator, which is one of our key momentum indicators. The underlying weakness in mega caps was/is one reason for the underperformance of the SPX and it is also the reason why it is difficult to see and interpret the current pattern still as a rising wedge. However, a cleaner and less distorted setup we have in the transport sector. Last week, the DJT confirmed its June bull trend, confirming the underlying bull trend and last week s market low as a pivotal support. The key point is the pattern and the multi-month divergence in our daily trend work is forming a near textbook like rising wedge formation. The consequence of such a pattern would be to see another but final near term top in transport, but a) a new high would only be marginal, and b) a re-break below the previous breakout level would trigger a short-term sell signal. Keep in mind, a rising wedge is usually a leading indicator for erratic moves and in this case we see the risk of a short and sharp sell-off into first half November, which remains our preferred timing for the next significant tactical bottom as the basis for another rally into year end. Chart 5. ) Russell-2000 Weekly Chart Over the last few weeks we have seen continued outperformance of the broader market versus mega caps underperforming aggressively. The problem is that in absolute terms we now also have a bigger nonconfirmation in the Russell-2000 forming in our weekly trend work, which is the same setup we have in the SPX and suggests the risk of a near-term setback. Last week the recent strong underperformers, staples, healthcare, and utilities all confirmed important support levels as the basis for a bounce. A temporary rotation back into defensive sectors would definitely support the market in case of a short-term setback. However, if we should see sectors such as DRG and staples breaking last week s reaction low, it would imply a more significant setback in the SPX and in this case we cannot rule out an overshooting towards 1570 into November, which is not our preferred scenario. NOT FOR DISTRIBUTION INTO THE U.S. UBS 3

4 US Equity Market Update: Chart 6. ) S&P Materials Chart 7. ) Oil Service Daily Chart Cyclicals Still Bullish Biased BUT! Over the last few weeks we highlighted the continued outperformance and constructive patterns in cyclical themes. Most of the outperforming cyclical sectors in the US confirmed their key support levels last week, and even in these sectors where we saw a fake/bear trap last week such as in chemicals, XOI, CYC and the BKX, which marginally broke its 62 key support, this fake does not negate the still constructive underlying patterns. The key message is that in materials, oil service and semiconductors, last week s reaction low represents a very obvious new pivotal support, and as long as these levels remain intact we can see more outperformance and new highs into ideally next week, which from a measured move target projection would call for 285/290 in the OSX, 410 to 416 in materials, and 515 in the SOX index. However, a new high in all these sectors will be very likely not able to bring us a new momentum high in our indicator work and this forming divergence in our trend suggests that the current move has a final character, which suggests the risk of a set back into November, before we expect the cyclical sectors resuming their underlying bull trends. Chart 8. ) US Semiconductors (SOX) Daily Chart Chart 9. ) US Banks (BKX) Daily Chart NOT FOR DISTRIBUTION INTO THE U.S. UBS 4

5 US Equity Market Update: Chart 9. ) US Healthcare (DRG) Daily Chart Chart 10. ) Consumer Staples Daily Chart Chart 11. ) Spread S&P-100 versus S&P-500 Defensives Confirmed Key Levels It is interesting to see that most of the underperforming defensive sectors such as healthcare, staples, and utilities confirmed key support levels last week, which makes the 1646 in the SPX to an even more significant key support level. In last week s report we highlighted the 200-day moving average in the consumer staples sector as a key support and potential basis for a bounce. This was and is important since the underperforming staples were one of the key drivers behind the underperformance of the mega caps and therefore also of the Dow Jones Industrials. Generally, although the staples sector has topped out in May, with just trading sideways, the overall pattern in this key sector can still be described as constructive as long as last week s reaction low holds. We have more or less the same setup in healthcare, where last week the DRG confirmed its late August reaction low. As long as this level holds, one could even interpret the whole pattern of the last few months as a bullish trend continuation pattern (ascending triangle) with breakout resistance at 440, whereas a break of last week s reaction low and the 200-day moving average at 418 would suggest the risk of a negative trend acceleration. In our September 24 th weekly report we highlighted the SPX-100 spread versus the SPX-500 mirroring the mega cap underperformance. The falling wedge that we have highlighted has been resolved on the downside, which was further bearish mega caps. However, with the 2011 major low in this spread we see mega caps moving into strong support versus the broader market, which could be a combination of two points a) this supports our toppish call on the Russell-2000 and b) it could be an indication for defensive sectors bouncing relative in case of seeing a corrective overall market set back into early November. NOT FOR DISTRIBUTION INTO THE U.S. UBS 5

6 Inter-Market Update: Short-term Bottom in DXY Litmus Test into December The lower September reaction high in the DXY has confirmed the July top as a major US dollar top and again the July top at in the DXY is a well defined pivotal resistance against many pairs, which means this represents a secular breakout level for the US dollar. On a very short-term basis, the US dollar is oversold and a break of would complete a shortterm trading bottom and imply that a more significant bounce is underway towards to any 82, which would translate into a EUR pull back towards However, any near-term dollar strength we see limited into late October/early November and it should post another significant lower reaction high as the next selling opportunity. From a cyclical perspective we continue to see a lower USD (higher EUR) into December, where we can expect to see the real litmus test for the DXY. Keep in mind, represents a key support and therefore a technical big point. A break of this level would imply a significant weaker US dollar into 2014, which would be important for us, as from a cross asset class perspective this would be latently bullish risk and in particularly commodities. Keep an eye on sterling. Last week the GBP has completed a small head & shoulder top formation after failing to break The July bull cycle was very steep and in this context a break of the July trend support is in our view very likely. However, given the underlying trend strength we see GBP posting another higher low, which means any near-term GBP weakness (which would tactically support the FTSE-100 on the equity side) should be corrective and limited towards before starting another significant rally towards 1.64 into year end. Chart 12. ) DXY Daily Chart Chart 14. ) GBP Daily Chart Chart 13. ) EUR Daily Chart Chart 15. ) DXY Weekly Chart NOT FOR DISTRIBUTION INTO THE U.S. UBS 6

7 Inter-Market Update: Gold Break Of 1273 Weighs on Structure!! After the anticipated rebound into August we warned about chasing gold and gold mines. In August gold was overbought and it was sitting at its initial target and key resistance at Another important point was the structure of the June/August rebound, since the whole pattern was just purely corrective (a-b-c pattern), and which we highlighted as problematic since these kinds of patterns are usually negative trend continuation or minimum part of a bigger corrective pattern, which further down the road still leaves the door open for a negative surprise. In this respect we recently highlighted the 1273 support, since a break of the early August low would ultimately negate any potential impulsive and therefore bullish wave extension going forward. Although we have yet not seen a sustainable break of 1273, the marginal break is enough to ultimately cement the corrective and therefore problematic structure in the yellow metal. Keep in mind, gold in EUR terms is very weak and on the way of re-testing its June low. So apart from any tactical swings and potential near-term bounces, the risk for another negative surprise and therefore a re-test if not even a break of the June low in gold is rising. Tactically, and although the current pull back is going deeper than favoured, we are sticking to our recent calls and continue to see at least one more significant bounce leg in the yellow metal and in gold mines into deeper December before we could see another potential tactical negative surprise into Q1. Short-term, gold is oversold and the momentum on the downside is deteriorating. Nonetheless, from a correlation standpoint the problematic point remains the internal weakness of gold, which was not able to profit from the Chart 16. ) Gold Daily Chart weaker USD. So if we are correct and we see a shortterm bounce in the USD it suggests further near-term headwind for gold, and its makes a serious re-test of the June low at around 1200 increasingly likely into later this month. According to our USD call, from a cyclical perspective the current gold set back can continue into later this month and/or early November before we expect another significant rebound/rally starting. On the downside we cannot rule out a test of 1200 and on the upside gold remains bearish biased as log as the yellow metal is not able to break its last lower reaction high at 1330, which more or less also represents the August down trend and therefore represents a tactical long trigger. Our upside target into December for gold remains at least a re-test of the August top at 1420, so despite the weak strategic picture we would definitely not throw in the towel as a trader. Chart 17. ) XAUEUR Daily Chart Chart 18. ) Gold Bugs Index (HUI) Daily Chart NOT FOR DISTRIBUTION INTO THE U.S. UBS 7

8 European Equity Market Update: Structural Breakouts in the Periphery!! Last year we called a major bottom for risk assets and this bottom we saw as the basis for a new cyclical bull market for equities/risk into minimum H if not even into With regards to the periphery we said last year, that after completing a major wave 5 bear cycle and given the huge classic bottoms that has been completed in the IBEX and the FTSE MIB we have seen the ultimate low of a secular bear cycle in the markets. With this year s correction into the June low the FTSE MIB, the IBEX, the PSI-20 and the Athens market have all posted higher bottoms versus last years low as a springboard for the current bull cycle. In late July we highlighted the IBEX breaking its 2009 underperformance trend versus core Europe, and in August we confirmed the relative breakout of Europe versus the US as just the beginning of a major trend reversal. In the meantime we have seen aggressive rallies in the periphery. In early September the IBEX has broken its 2007 bear trend and last week we highlighted the FTSE MIB breaking its strategic resistance at 18000, which represents a long-term buy signal. So where do we stand in the periphery and what can we expect into next year? Short-term, the periphery is very overbought and with the trends in the IBEX and FTSE MIB taking a vertical/exhaustive shape, and heading into bigger resistance we see the periphery vulnerable for a pause/corrective pull back into November, which means tactically we would wait for a pull back to buy/add. In the bigger picture it is the recent high momentum breakout in all the peripheral markets, which is bullish. No bull market ends with a high momentum top, and this suggests that any tactical weakness near-term will still be a buying opportunity for more upside into December and finally into next year. The break of longterm bear trends in absolute and relative terms represents a major trend shift and although the overall rebound structure in the periphery has only a corrective (A-B-C) shape, this suggests significant higher price targets into next year if we apply the principal of equality of wave A to wave C, which has started in June this year. Short-term, the IBEX is heading into stronger resistance at 9800, which is the 38% retracement of the 2007/2012 bear cycle. After a corrective set back we expect to see the break of this key level, and apart from any tactical volatility over the next few weeks (including a significant correction into Q1) this would call for a next major target at 11000, which we expect to be reached into next year. In the FTSE MIB the break of the key resistance was a game changer and Italy is also about to complete a major double bottom versus core Europe, which is bullish and suggests a test of the 2009 bear trend resistance at / into next year. Pattern wise the lagging markets in the periphery are Portugal and Greece. However, the patterns in these markets are very similar to Spain and Italy and in this context we also see Portugal and Greece breaking their relevant key resistance levels. Short-term the PSI-20 is facing strong resistance at 6390, which we would see as a basis for a pull back. Into December we expect a test of the 2009 bear trend at around 6660, which is the 50% retracement of the 2009/2012 bear cycle and a break of this level would suggest a target at 7200 into next year. Keep an eye on the Athens market. The technical big point of the AT FTSE is at 970 and taking out this level would break the 2007 bear trend, which would imply a target towards 1200 to 1300 into next year. Chart 19. ) IBEX-35 Weekly Chart Chart 20. ) FTSE MIB and PSI-20 NOT FOR DISTRIBUTION INTO THE U.S. UBS 8

9 European Equity Market Update: Chart 21. ) AT FTSE Composite Daily Chart Keep an eye on the Athens market. The technical big point of the AT FTSE is at 970 and taking out this level would break the 2007 bear trend, which would imply a target towards 1200 to 1300 into next year. Chart 22. ) IBEX-35 versus STOXX IBEX35I/DJSTOXX breakout In late July we highlighted the IBEX breaking its 2009 underperformance trend versus core Europe and we saw this as a game changer for Europe and a leading indicator for overall Europe to break its underperformance trend versus the US. In August we ultimately confirmed the relative breakout of Europe versus the US. Again, this year s relative low of Europe versus the US completes a major wave 5 sequence, which we see just as the beginning of a major trend reversal Chart 23. ) FTSE MIB versus STOXX-600 Chart 24. ) STOXX-600 versus S&P-500 NOT FOR DISTRIBUTION INTO THE U.S. UBS 9

10 European Equity Market Update: Europe Trades in a Wave 5 Sentiment is Toppish Given the constructive patterns in the DAX and Euro Stoxx we said last week that as long as the Euro Stoxx trades above 2877 we can still expect new highs in the outperformer markets such as the periphery, the DAX and the Euro Stoxx into mid October before seeing a corrective set back into first half November, and the increasing selectivity in Europe we see in fact as a leading indicator for a near-term trading top. Whereas in the underperformer (SMI, FTSE-100, AEX, OMX and OBX) we have already seen initial set backs over the last two weeks, which caused a break of the June bull trend in the STOXX-600, we see the rally in the outperforming periphery getting increasingly exhaustive. On the upside we continue to see the Euro Stoxx limited at 3000 to best case 3070 into next week. Into first half November we anticipate a pull back to 2850 and worst case 2800 before starting a next rally leg into year end. With the sentiment in Europe reaching extreme levels we wouldn t be too aggressive in chasing the markets at current levels. Chart 25. ) Euro Stoxx-50 Daily Chart Euro Stoxx 50: The picture in Europe is getting more selective. Whereas via the underperforming markets we saw a first set back in the STOXX-600, the Euro Stoxx obviously profits from the massive rally in the periphery. However, with the SENTIX sentiment reaching extreme levels for Europe and the moves in the periphery getting vertical the air is getting thin shortterm and tactically we see this set up as the basis for a corrective set back into November before starting the next rally into year end. The Euro Stoxx we see capped at 3000 to best case 3070, the STOXX-600 should be capped 319. Into November we expect the Euro Stoxx to pull back towards 2855 (September breakout level) and worst case we could see the closing of the early September gap at Chart 26. ) Euro Stoxx with SENTIX Index Chart 27. ) STOXX-600 Daily Chart 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 FTSE-100: A new reaction low below the late August trough is a result of the ongoing underperformance of the FTSE-100 versus the outperforming markets in Europe. However, inline with our last week s call we see the UK market bouncing and with a bigger reversal in the GBP on the currency side the bounce is significant. Nonetheless, from a pattern standpoint and following our overall tactical market view we see the risk of another corrective set back into first half November to minimum re-test last week s reaction low as the basis for a real re-test of the May high into later this year. Last week s reaction low and the subsequent reversal have produced a new pivotal level on the downside at 6317 and while trading above, the index is in bouncing mode with limited upside and big resistance at 6628/6696. DAX-30: A little later than expected, the DAX nonetheless managed to break out of its small September/October consolidation pattern and is re-testing its all time high at A break of 8770 would open the way for an extension of the upside towards 8850, which we see as a cap for the market short-term. Again, into November we expect a corrective set back and depending on whether we finally see an overshoot towards 8850 we continuing to have a DAX target at 8457 to 8300 as the basis for a new rally into deeper December where, given the fresh relative breakout of the German market we can expect to see new index highs towards Chart 30. ) Swiss Market Index Daily Chart Swiss Market Index: The Swiss Market remains the underperformer but similar to the UK market the SMI was last week oversold and due for a bounce, which is reaching the upper end of our target zone at around 8000, and which represents a pull back to the broken June trend. Given the increasingly overbought short-term stance we see further upside limited and given the fact that we do not expect any fundamental trend change in the sector performance we see the Swiss Market continuing in a broad based trading range and therefore biased for another set back towards 7710 into November. 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

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14 Weekly Technical Indicators: (Source: Pinnacle Data, Datastream) Charts: Metastock NOT FOR DISTRIBUTION INTO THE U.S. UBS 14

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