January 2015 Technical Market Outlook

Transcription

1 13 January 2015 January 2015 Technical Market Outlook Peter Lee Chief Technical Strategist CIO Wealth Management Research This report has been prepared by UBS Financial Services Inc. ( UBS FS ). All charts and data are sourced from Thomson Reuters, Bloomberg, Indexindicators.com and UBS CIO WMR as of 12 January 2015

2 Technical Highlights Equities Two competing technical patterns have developed over the past six-plus months. We believe the impending battle between the bulls and the bears will help to decide the next directional trend. The bears claim that this is a broadening top pattern. The bulls are convinced that this is an ascending head/shoulders bottom formation. We will let the market decide who is correct. Nonetheless, we will note that both technical patterns imply substantial upside/downside potentials/risks as they represent technical bases of 273-points and 199 points, respectively. If you favor the bulls then a breakout above 2,108-2,127 suggests points or an upside SPX target to 2,307-2,314. If you favor the bears then a violation of 1,964-1,990 opens the door for the start of a correction to 1,821 and below this to 1,715. A convincing decline below 1,715 confirms the broadening top igniting a deeper and more extensive correction. Currencies US Dollar Index (DXY) has broken out a 9-year symmetrical triangle as well as the pivotal 1985 downtrend at 85/87. Since there is a points technical base this breakout renders upside targets to This is similar in scope to the early to mid- 1990s triangle breakout in USD. On a near-term basis, DXY is trading at overbought levels and failure to clear above key initial resistance at can lead to a consolidation back to initial support in the high-80s. 10-year US Treasury yields TNX has broken its major Jul '12/May '13 uptrend (2.14%) as well as both of the crucial 61.8% retracements (2.02/2.15%) from the 2012/2013 to 2014 rallies. This has led to a sharp decline to retest the recent Oct '14/Jan '15 lows ( %). A convincing breakdown here open the door for the next decline towards the 76.4% retracements (1.94/1.77%) and below this to the May '13 low of 1.61% and possibly to 1.38% or the Jul '12 reaction low. Commodities Has the super bull cycle in commodities come to an end? The Bloomberg Commodities Index Total has violated its 1999 logarithmic uptrend (265) and the 61.8% retracement (249) from rally. This confirms the end to the super bull cycle in commodities and suggests risks to or the Mar '09 lows and the 76.4% retracement. Key resistances are , , and Key resistances are , , and then S&P 500 Sectors It has become increasingly a macro driven market where the directional trends in macro financial markets tend to determine trading and investment decisions. Recent technical developments suggest the continuation of the major trends from last year. That is, the strong US Dollar trend will continue creating an even weaker Euro and Yen. This will lead to continued selling in Commodities as WTI Crude and Brent Crude enters into a final climatic selloff/capitulation. The disinflationary trend in US Treasury Yields suggests even lower US interest rates. Foreign stocks namely Asian equities including Chinese, Indian and Taiwanese can continue to outperform. Within the S&P 500 sectors the above macro trends favor the following: S&P Information Technology, Telecom, select Financials, select Healthcare and select Consumer Discretionary. The above macro trends will likely continue to pressure S&P Energy and Materials as well as natural resource intensive countries. 1

3 S&P 500 Index (SPX) Technical Forecasts SPX Technical Targets 2,102-2,127 (trading), 2,215-2,230 (medium), 2,319-2,336 (intermediate) and 2,509 (long-term) SPX Downside 1,924-1,984 (trading), 1,821-1,840, (near-term), 1,738 (intermediate) and 1,580-1,600 (long-term) Trading/Near term outlook SPX has become increasingly volatile as it enters into back half of a stage 3 bull market rally as two competing technical patterns have developed over the past 6-months - a bullish ascending head/shoulders top and a bearish broadening top pattern. The outcome of these patterns will help to determine the extent of the current rally or the correction. Trading above 2,102-2,127 negates a broadening top formation and confirms an ascending head/shoulders bottom breakout allowing for the resumption of the Mar '09 rally. On the other hand violation of 1,964-1,990 or the 150-day/200-day moving averages and recent Dec '14/Jan '15 lows warns of a correction to 1,821 or the Oct '14 low and below this to 1,715 corresponding to the bottom of broadening top. Intermediate term outlook The dominant and prevail intermediate term trend remains the Mar '09 uptrend channel now rising between 1,592-1,964. Since the technical base is 372 points a breakout above 1,964 still renders SPX target to as high as 2,336, medium term. A second uptrend channel from Oct '11 between 1,865-2,092 or 227-points also remains intact. However, it still needs to clear above 2,092 to confirm a technical breakout resulting in an SPX upside target near 2,319. On the downside, although higher prices are still possible SPX may become increasingly vulnerable for a deeper correction (15-20%) in the next year or so. We recommend traders and investors closely monitor downside risks this year. Key initial supports is visible along 1,964-1,999 corresponding to the top of its 2009 uptrend channel and the pivotal 30-week moving average. Secondary support is also available along 1,821-1,865 coinciding with the 2011 uptrend and Oct '14 low. Longer-term outlook The March '09 SPX rally is now 70-months old, with gains of nearly 214%. This has surpassed the rally of105% in 69 months and is closing in on the bull rally of 256% in 71 months. Although the current bull may be maturing, it still in stage 3 rally which is the mania/speculative/melt-up phase of a bull trend. Chasing of performance and herding tends to result be prevalent at this stage of the rally. This often leadstoan overshooting of upside targets. If this scenario is again repeated SPX can achieve our target of 2,509 which is based on technical base of 909 points added on to the pivotal May '13 breakout at 1,576-1,600. The caveat to this technical call depends heavily on SPX retaining the following key supports: 1,924-1,984 (initial) 1,821-1,840 (secondary), 1,738 (intermediate term), 1,580-1,600 (longer-term). March 2000 structural bull trend and the March 2009 cyclical bull trend are converging to inflection points It remains our contention the cyclical bull rally that started on Mar '09 ( low) has entered into the third-stage of a four-stage bull market rally (Jan/Jun '13) or commonly referred to as the Mania/Spec/Melt-up phase. This is often the emotional phase of a bull rally where the investment public (retail investors) are active and institutional investors tend to chase returns. We also believe the structural sideways trend that began on Mar 2000 may have ended but it still lacks a confirmation of the May '13 breakout (1,600). Both of these trends (i.e., cyclical and structural) are converging toward inflection points. We suspect the extension of the May '13 trend line breakout now rising near 1,600 will define the new normal/equilibrium level/fair value for SPX for years to come. This would then imply that a successful test of this pivotal support can help to confirm the May '13 breakout and the next structural bull. In the meantime we maintain two possible scenarios for SPX: Scenario 1 (Bullish View) The May '13 break out above 1,600 confirms the start of the next major structural bull trend. However, a pullback to or near this prior breakout is still needed to reaffirm the May '13 multi-year breakout resulting in the next sustainable rally to 2,509. However, the recent 10% correction is sufficient to allow for the Mid-term Election Year trading strategy to sustain into Since 1934, SPX has produced an average return of 42.51% from the Mid-term Election year low (1, Feb '14) to the following year close (i.e., 12/31/15). A 42.51% return added to 1,738 renders a SPX target at 2, Scenario 2 (Bearish View) The May '13 break out at 1,600 is a false breakout/bull trap as SPX fails to maintain this breakout and reverses below its prior key breakout. This then triggers a climatic sell-off (20% to 30%-plus) as SPX breeches its 30-month moving average (1,743) and its pivotal March 2009 uptrend (1,580-1,600). SPX then quickly falls to 1,200 thereby washing out/exhausting the remaining sellers in the marketplace setting the stage for the next structural bull market. 2

4 SPX Index Monthly Seasonality Study (1929 Present) Yearly % Time Period Duration Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Returns All Mkt 86 years Bear Mkt 20 years Bull Mkt 17 years Bear Mkt 16 years Bull Mkt 18 years Bear Mkt 14 years Secular Bear/Trading Markets (3) Average returns for three months (Jun, Jul & Aug vs. Nov, Dec & Jan) Secular Bull Markets (2) Average returns for three months (Jun, Jul & Aug vs. Nov, Dec & Jan) First Year (year 1) Mid-term Election (year 2) Pre-election Year (year 3) Election Year (year 4) As another Mid-term Election Year (2014) comes to an end and the next Pre-Election Year (year 3) begins we transition into one of the stronger periods of the 4-year Presidential Year cycle. The average yearly returns have been 10.35%. If this trend is repeated this year this would imply a SPX target closer to 2,236 as early as 12/31/15. If we also apply the historical average return of 42.51% from the mid-term Election Year low of 1, (Feb 2014) we arrived at an optimistic SPX target of 2,477 which is just marginally below the longer term SPX target of 2,509 based on the May points-technical base (head/shoulders bottom pattern) breakout target above 1,600. 3

5 Stock Market Psychology Fear, Greed, and Hope Greed/Euphoria 1 st Half 2007 Greed/Euphoria Thrill Anxiety Are we here? Thrill 2016 Excitement Denial Excitement Optimism Fear 1st Half 2008 Optimism 1 st Qtr nd Half 2016 Desperation Relief Panic Capitulation Hope Despondency 4 th Qtr 2008 Depression 1 st Qtr /2018 4

6 4 Stages of a Bull Rally Price Stage I 2009 to 2010 Smart Money Insiders, Contrarians, and Deep Value Investors Stage II 2011 to 2013 Institutional Money Professional traders, Money Managers, Hedge Funds, and etc. Media/Press Attention Stage III 2013 to 2015 Stage IV 2016 to 2017? "New Paradigm" Denial Delusion Return to "Normal" Greed Bull Trap Fear Public Money - Retail Investors Optimism Are we here? Capitulation Return to the Mean First deep correction Despair Bear Trap Historical Mean Acceleration Accumulation (Stealth) Phase Awareness Phase Mania/Speculative /Melt Up Phase Blow off Phase Time 5

7 SPX Index Secular Trends ( ) 2 Possible Scenarios Scenario 1 = May 2013 breakout near 1,600 is successfully retested thereby confirming the start of the next structural bull trend. Scenario 2 = Failure to maintain 2013 breakout (1,600) suggests a final sell off and then the start of the next structural bull trend. 10,000 1, Secular Bear Trading Range Secular Bull Secular Bear Trading Range Secular Bull Secular Bear Trading Range Secular Bull Secular Bear Trading Range 2000-Present 10 For the past 200+ years, SPX has consistently alternated between periods of long-term bullishness via secular bull trends and periods of long-term bearishness via secular Bear/Trading range trends without ever missing a cycle structural bulls: , , , , , , , (2013-Present?) 8 structural bears/trading ranges: ( ?), , , , , , ,

8 Dow Jones Industrial Avg to 1984 and 1994 to Present Although no two markets are the same the 1964 to 1984 market and the 1994 to present appears to be strikingly similar. That is, the structural sideways market (stagflation) was preceded by a spectacular Nifty-Fifty bubble burst. In addition, geopolitical events (OPEC Oil embargo) created extreme volatility from a macro perspective. If we fast forward to the 1994-present market we have experienced three bubble bursts including the Tech/Telecom bubble, the Real Estate/Credit/Financial bubble and the Commodities bubble. From a macro/geopolitical perspective the Sovereign Debt crisis in Europe, the Currency problems in Emerging Markets and the Middle East and Ukraine/Russia events have created volatile market conditions. We also find it uncanny that both markets generated simultaneous and yet competing technical formations including a bearish Broadening Top (higher highs and lower lows pattern) and a Head and Shoulders Bottom. Note that towards the later stage of the prior Stagflation cycle ( ) a Head/Shoulders Bottom breakout and the negation of a Broadening Top during 1982/1983 that first signal the start of the next major structural trend. However, it was the final pullback of nearly -17% to 1,082 (6/84) that confirmed the end to the structural sideways market and the beginning of the next structural bull trend as DJIA enter into a parabolic move of +153% from 6/84 to 8/87. Is the recent breakout above 14,198 (3/13) and the subsequent negation of the Broadening Top at 16,577 (12/13) signal the end to the structural sideways trend? And will a successful test near the prior breakout confirm the start of the next structural bull? 7

9 S&P 500 Index 1964 to 1984 and 1994 to Present Similar to the DJIA study in the previous page we find it intriguing the current market conditions for SPX over the past decade or so also closely parallels that of the market from both a macro/geopolitical/tail risk as well from a technical perspective. Although it appears that he past 14-plus years have been much more volatile and unpredictable than the prior secular trading range market, the duration and magnitude of trading swings are quite comparable. That is, in the past cycle it required 16-plus years to repair all the damages incurred from the Nifty-Fifty blowup, Oil Embargo and Stagflation before a new structural bull market can begin in earnest in Today, the SPX is also working through 14-plus years of the unwinding of excesses from the Tech/Telecom, Credit/Financial/Real estate, Commodities as well as the geopolitical/macro events in Europe, Middle East and Emerging Markets. Notice that at the height of the prior Broadening Top pattern widespread speculation led to an extreme high of 173 from an extreme low of 62 resulting in a 2.79/1 ratio. SPX recently traded to an extreme high of 1,991 from a low of 667 or a ratio of 2.99/1. This then suggests SPX has now exceeded the prior rally and may vulnerable for a pullback. In the past cycle the major breakout off of a multi-year technical pattern needed to retrace back to prior breakout to confirm a bullish pattern. For example, in Jan 1983 SPX broke out at 146 prompting a rally to (Jun 1983) before a correction of % to its prior breakout at 147 (Jul 1984). A successful test here confirmed the prior breakout setting into motion the next structural bull trend ( ). Although we not necessarily calling for the same scenario to occur we cannot help but notice the May 2013 breakout near 1,600 has yet to be confirmed. Will a successful retest of this key support finally confirm the start of the next structural bull trend? 8

10 SPX Index Long-, Medium- and Short-term Trends The Mar 2009 SPX rally is over 69 months, with gains of 214%. The prior 2 bull rallies were: (71 months and 256%) and (60 months and 105%). Although this rally is maturing it can continue and possibly match the rally as long as SPX retains the following key supports: 1,924-1,985 (initial) 1,814-1,821 (secondary), 1,738 (medium term), 1,600-1,650 (intermediate term) and 1,576-1,580 (long term). SPX has become increasingly volatile as it enters into back half of a stage 3 bull market rally. Stage 1 is the accumulation phase, ( ). Stage 2 is the awareness phase ( ) and Stage 3 is the Mania/Speculative/Melt Up Phase (2013-present). Two competing technical patterns have developed over the past 6-months - a bullish ascending head/shoulders top and a bearish broadening top pattern. The outcome will determine the extent of the current rally or correction. Trading above 2,102 or the top of the broadening top suggests a rally to 2,375. Violation of 1,964-1,990 suggests downside to 1,821/1,715. Broadening Top pattern??? Height=273 points Breakout above 2,102 renders upside to 2,375 Trading below 1,964-1,990 suggests 1,821/1,715 Mar 2009 uptrend channel = 1,592-1,964 Breakout above 1, or 2,336 Oct 2011 uptrend channel = 1,865-2,092 Breakout above 2, or 2,319 Ascending head/shoulders bottom pattern??? Left/shoulders=1,905/1,973, Head=1,821 and neckline resistance=2,108-2,127 Breakdown below 1,592 1,220 Break down below 1,865 1,638 The Mar '09 uptrend channel is 1,592-1,964 or a technical base of 372 points. A breakout above 1,964 renders SPX target to 2,336. A secondary uptrend channel from Oct '11 (1,865-2,092) or 227-points hints of a breakout above 2,092 to 2,319. Key supports: 1,964-1,999 (top of 2009 channel/30-wk ma) and 1,821-1,865 (2011 uptrend and Oct '14 lows. MACD indicator is showing a head/shoulders bottom pattern??? An ascending head/shoulders bottom has also developed. The left/right shoulder is 1,905 (Aug '14 low) and 1,973 (Dec '14 low). The head is 1, or Oct '14 low and neckline resistance is 2,108-2,127. A breakout above 2,108-2,127 suggests points or an upside target to 2,307-2,314. On a near-term basis, an overbought condition suggests a trading range between 1,973-1,992 or the Dec '14/Jan '15 lows and 2,064-2,094 or recent highs. The % retracement from Oct-Dec '14 rally at 1,924-1,957 as well as 9 the Aug '14 low at 1, act as secondary support. 1,821 or the Oct '14 low remains key support as violation here confirms a top and the start of a deeper correction.

11 US Equities SPX, Russell 3000, Russell 1000, NDX 100 SPX has broken above the extension of its 2000/2007 highs at 1,597 (May '13). This action negated a broadening top and confirms a head/shoulders bottom. It also hints of the start of a structural bull trend. Breakout here suggests points or upside target to 2,509, overtime. The 10-mo ma (1,985) and 2009 uptrend (1,943) provide key initial support. Secondary support is also at 1,821, 1,730-1,743, 1,646, 1,600, 1,549 and 1,221. The Russell 1000 Index, a proxy for large-cap US stocks, has convincingly broken above its key resistance at 886 in May This breakout and a positive outside month in Aug 2014 is significant as this renders next target to 1,270, or the top of its 2009 channel. Supports: 1,100-1,105, 1,062-1,063,1,011-1,012, , 886, 859. The Russell 3000 (RUA) is a proxy for the overall health of US equities. It has broken out above major resistance at 971 (May 2013). This can extend the rally to the top of its 2009 rising wedge (1,283). However, a rising wedge pattern also warns of a maturing rally. Key initial support is near the 10-mo ma (1,182) and the bottom of 2009 wedge (1,185). Violation of the above support coupled with a lower low below Oct '14 low of 1, warn of a correction to 1,039-1,043, 1,026, 971, 927, 904. The NASDAQ 100 or the large cap OTC market continues to lead the broader NASDAQ Composite market as well as other key US indexes. It has convincingly broken out above the top of its 2002 uptrend channel (2,994) and above its 50%, 61.8% and 76.4% retracements (2,806, 3,280, 3,867) from the decline. These breakouts render next targets to 4, ,847 or the top of its 2009 channel and the 2000 record high. Supports: 4,089-4,090, 4,010, 3,960, 3,805, 3,700-3,738, 3,552-3,617, 3,414-3,419, 3,379, 3,302-3,331, and 2,994-3,

12 US Equities Dow Jones Industrial Average, Dow Jones Transportation Average, NYSE Composite, Russell 2000 Although the blue chip Dow Jones Industrial Average has lagged its larger cap counterpart (SPX and NDX) it has improved via a positive outside month during Oct We believe DJIA can trend higher as long as DJIA stays above key near-tointermediate term support along its 10-mo ma (17,151), extension of its broadening wedge breakout (16,927), the bottom of the 2009 uptrend channel (15,904) and the 10-mo ma (15,558). Upside targets to the top of the channel at 19,752 is reasonable. NYSE Composite has finally broken out above its 2007 all-time high (10,387). However, it continues to lag its peers as it is trading considerably below the top of its broadening top (14,636). A Jul 2014 negative outside month and weak relative strength warn of a lack of leadership/sponsorship. Key initial resistance is 11,106-11,108 (Jul/Sep 2014 highs). Breakout here renders upside to the top of its 2009/2010 uptrends (13,28013,653/14,636). Key support is at prior breakout at 10,387 and 9,886-9,794. Dow Jones Transportation Index has taken over market leadership role soon after the breakout above the Nov 2013 broadening top at 7,538 (point E). This reinforces the Dow Theory (DJIA/DJT) and suggests next upside targets to 9,430 (medium term) or the top of its 2009 rising wedge and above this to 12,492 or the top of its 2009 uptrend channel (longer-term). Key supports are: 8,581-8,659, 8,366, 7,959, 7,781, 7,700, 7,538-7,591, 7,502, 7,244, 7,000-7,005, 6,680, 6,599, 5,487-5,628. We maintain a cautious technical view on the Russell 2000 Index as the small cap market continues to underperform the broader US market. Although oversold rallies are possible we are concerned about a potential broadening top pattern (1,201) as well as formidable resistance near its Mar/Jul 2014 highs (1,213-1,214). A breakout here would help allow for the resumption of the rally to 1,511 or the top of its 2009 uptrend 11 channel. On the downside, two negative outside months during Jul/Sep 2014 warn of further volatility. Key supports: 1,158, 1,040-1,047, 1,009, 985, 877, and 856.

13 International Equities Nikkei 225/EAFE/EM/Shanghai SSE Nikkei 225 has broken out of its 1996 downtrend (15,400) and the top of a large flag/pennant pattern. A breakout above 16,320-16,374 also renders next targets to 18,300 (2007 high) and then the 38.2% retracement from decline (19,205). Above this renders upside to 20,833-22,751 or the 1996/2000 highs as well as the 50% retracement (22,976). Key supports: 17,490-17,521, 16,534-16,721, 16,320, 15,760-15,794, 14,529-14,754, 13,836-13,996, 13,569, and 12,416-12,550. The Japanese stock market has broken out of key resistance at 15,400 or its 1996 downtrend and 16,320-16,374 or the Jan/Sep 2014 highs and the top of a major flag/pennant formation. This renders next target to Feb 2007 high and the 38.2% retracement from 1990 to 2008 decline at 18,300 and 19,205 MSCI Emerging Markets is nearing an inflection point as evident by two converging triangle type patterns. Key resistance is near the top of a larger symmetrical triangle pattern at 1,075 and 2012/2013 highs at 1,085-1,105. On the downside, key support is at the bottom of the triangle at Also note the 38.2% retracement from 2008 decline is at providing key support on pullbacks. Violation here confirms a major breakdown and suggests downside % retracements at 829/739. MSCI Emerging Markets remains confined to a sideways large symmetrical triangle between and 1,070-1,085. Although a fan breakout hints of a recovery two negative outside months (Jul/Sep '14) and a large head/shoulders top as well as a rising wedge warn of a test of key support at 1,615-1,650. Shanghai Composite has broken out of three key trend channels including the 2011 downtrend (2,100), the 2009 downtrend (2,285) and the extension of the 1991 uptrend channel (2,995). This confirms an intermediate term recovery. The MSCI EAFE rally stalled at 2,000 or just below its 76.4% retracement (2,045) from decline. Unfortunately two negative outside months (Jul/Sep 2014), large head/shoulders top and a rising wedge warn of a correction to key support at 1,615-1,650 or the 50% retracement from rally and the decline. A breakdown here renders downside to 1,567, 1,465-1,471 and 1,300. Supply: 1,800/1,850/1,900/2,000. Three breakouts above 2011 downtrend (2,100), the 2009 downtrend (2,285) and the extension of the 1991 uptrend channel (2,995) signaled the start of a Shanghai Composite intermediate term recovery. Next key resistance is 3,368-3,478 or the 38.2% retracement of the decline. Although higher prices to 3,894-4,421 is possible, over time the recent sharp rally has created an overbought condition that warns of a consolidation. Key supports: 2,950-3,000, 2,650-2,660, 2,445-2,483, 2, ,280, 2,178-2,183, 2,135-2,127, 2,080-2,087, 1,974-1,991, 1,946-1,949, and 1850.

14 Currencies US Dollar Index, Euro and Yen US Dollar Index (DXY) has confirmed 3 key technical patterns: 2-year trading range at (Sep '14), 9-year symmetrical triangle at 85.5 (Sep '14) and the 30-plus year falling wedge at 87 (Nov '14) thereby confirming the end to the structural bear trend in USD and the start of another structural bull trend. DXY targets: or Nov '05 highs and 23.6% retracement from decline, or 1991/1994 highs and 50% retracement decline),101.8/ or 61.8%/38.2% retracements and or the 1989 high, 76.4% retracement and the triangle breakout target. EUR/USD has also broken major support at corresponding to the Jul '12 low, the 50% retracement from rally and the bottom of a symmetrical triangle/neckline support level. This breakdown confirms an intermediate term top and suggests next downside targets to (Nov '05 lows), (61.8% retracement from rally), (1985/2001 uptrend, 76.4% retracement, and Jun '89 lows). Resistances: , , , /1.3096, A 30-year bearish falling wedge breakout last month above confirms the start of a structural bull trend in the US Dollar Index rendering upside targets to 92.63, 95.86, , , and then EUR/USD has violated major intermediate term support at This breakdown now renders downside targets to (near-term), (medium), and (long-term). US Dollar index has broken above key resistances at 85/87 confirming a 9-year symmetrical triangle and the pivotal 1985 downtrend. Since the base is points this suggests upside targets to as high as , over time. USD/JPY is approaching major resistance at or the 1990 downtrend as well as the extension of the 1995 uptrend and the Jul '07 high USD has been broken out a 9-year symmetrical triangle as well as the pivotal 1985 downtrend at 85/87. Since there is a points base this breakout renders upside to This is similar in scope to the early to mid- 1990s triangle breakout. Key supports are: (2009/2010 highs), (Oct '14 high/nov '14 low), (Sep '14 breakout/10-mo ma), 82.25(30-mo ma), and (2011/2012 lows). USD/JPY has broken out above key resistance at or the 1998 downtrend and the 61.8% retracement of the decline. This breakout has led to a sharp rally that has quickly surpassed secondary resistance at or Dec 2005/Jan 2007 highs and is now challenging pivotal medium term supply at or the 1990 downtrend line, extension of 1995 uptrend and the Jul '07 reaction highs. Breakout here signals a structural bull trend and upside to Key supports: (Dec '14 13 lows), (10-mo ma, 30-wk ma and Aug '08 highs), (Jan '14 highs), (2014 lows), and (early 2013 breakout).

15 Commodities Bloomberg Commodity, Gold, Crude Oil, Copper Has the super bull cycle in commodities come to an end? The Bloomberg Commodities Index Total has violated its 1999 logarithmic uptrend (265) and the 61.8% retracement (249) from rally. This confirms the end to the super bull cycle in commodities and suggests risks to or the Mar '09 lows and the 76.4% retracement. Key resistances are , , and Gold has declined 40.74% in 3 years before finally rallying from key support at 1,151-1,182 coinciding with the 61.8% retracement from rally and 2013/2014 lows. A positive outside week on 12/5/14 has triggered a technical oversold rally to initial resistance at 1,240-1,269 (Mar '14 downtrend and 30-wk ma) and above this to 1,337(Aug '13 downtrend). Aug '13/Mar '14 highs at 1,428/1,391 is key supply. Below 1, suggests ,014.6 or the 76.4% retracement and Sep '09 breakout. Key resistances are: 1,250-1,255, 1,340-1,345, 1,391-1,428, and 1,525-1, Violation of 1999 log uptrend line at 265 and a subsequent violation of 61.8% retracement (249) from rally confirms an end to the super bull cycle in commodities. 1,151-1, ,015 Gold is rallying from pivotal support at 1,151-1,182 back to initial resistance at 1,240-1,268. Violation of its 2010/1998/2001 uptrends at 93/66/57 and Jan '15 low (46.83) suggest a retest of the 2004 breakout and 76.4% retracement at and /38 Copper's 3-year downtrend channel is nearing an inflection point at or the Oct '09 and the Jun '10 lows. The 56.53% decline in Crude Oil over the past 7 months has pushed the MACD indicator close to its 2009 bottom. Copper remains in a bearish 3-year descending triangle, head and shoulders top and/or downtrend channel. Violation of confirms a breakdown and suggests next downside to the 61.8% retracement (2.54) from rally and possibly to (Feb '07 lows and 76.4% retracement). Key resistances are: , , , , 3.55, and then Violation of three pivotal uptrends including 2010/1998/2001 uptrends at 93/66/57 coupled with a subsequent violation of recent Jan '15 low of can trigger a retest of the major 2004 breakout as well as the 76.4% retracement from rally at and then The 2008 bottom at 32.4 provides additional key support under an extremes condition (i.e., 1/85-4/86 and 7/08-12/08 selloffs). Note that the 14 MACD indicator is also approaching 2009 extreme low prompting a potential technical oversold rally. Key initial resistance are: , 58.53, , and

16 Fixed Income US 10 & 30 Year Treasuries (TNX/TYX) A disinflationary environment since 1981/1982 remains intact. However, conflicting technical signals have created a mixed near to medium term 10-year US interest rate trend. A monthly golden cross buy signal (Aug '13) and a positive outside month (May '13) warn of a retest of 3.04% and possibly the top of the channel (3.62%). Negative outside months (Jan/Jul 2014) also hint of a decline to % and then 1.61/1.38%. The implied volatility in TNX has been extreme as yields fell to an intra-day low of 1.87% (10/15/14) before closing the day at 2.09%. Although we can still experienced wide swings this year it will be more muted, at least from a near to medium term basis. TNX is likely to be confined to the following trading ranges: Near term range = 1.87% and 2.2%, Medium term = 1.61% and 2.65%, and longer term = 1.38% and 3.25%. Golden cross buy signal and a positive outside month (May '13) suggest 3.04%/3.62%, over time. However, negative outside months on Jan/Jul '14 also hint of a decline to /1.61%/1.38% before higher rates. Short term trading range = % and % Medium term trading range = % and 2.65% Long term trading range = 1.38% and % 30-year Treasury Yields (TYX) is currently testing major support at % or the pivotal Dec '08 and Jul '12 lows % TNX has broken key support at %. A break of % suggests 1.61/1.38%. Historically, the 30-year US Treasury yields (TYX) has been an excellent indicator of major US interest rate trend changes. Specifically, over the past 6 years TYX has been uncanny in leading pivotal turns in US interest rates. The current test of crucial lows during Dec '08 and Jul '12 at % will likely help to decide the next major turn in rates. The ability to maintain key support can trigger a rally to %/ %/3.75%. A break below 2.44% renders downside to 2-2.2%/1.9-2%/1.31%. TNX has broken its major Jul '12/May '13 uptrend (2.14%) as well as both of the crucial 61.8% retracements (2.02/2.15%) from the 2012/2013 to 2014 rallies. This has led to a sharp decline to retest the recent Oct '14/Jan '15 lows ( %). A convincing breakdown here open the door for the next decline towards the 76.4% retracements (1.94/1.77%) and below this to the May '13 low of 1.61% and possibly to 1.38% or to the Jul '12 reaction low. The ability to find support at % can trigger an oversold rally to initial resistance at % and then %. 15

17 S&P 500 Sectors Consumer Staples & Telecom Services S&P Consumer Staples exceeded its technical target of but continues to retain both of its near-term and intermediate term uptrend channels. However, a negative divergence exits between price and the Relative Strength/MACD charts signaling a consolidation phase. Supports: , , , S&P Telecom Services bounced off of its 2010 uptrend (now at 155). However, key near term resistance is evident near or the highs. On an intermediate term basis, the 2009 broadening top pattern and a 2-year head/shoulders top warn of further volatility. Key support is at S&P Consumer Staples has been surprisingly strong from a price basis. However, it is nearing key resistance along the top of its 2009 uptrend channel near 507. An overbought condition and failure to breakout may lead to a pullback to and possibly to A successful test of 2010 uptrend has led to a technical rally towards key near term resistance at However, a Broadening Top and Head/Shoulders top formations still warn of future volatility. Recent breakdown below its 2002/2003 falling wedge warns of continued relative underperformance. Relative Strength and MACD charts are not yet confirming new price highs. Relative strength and MACD indicator have improved in recent months. However, they still need to clear above their respective resistances to signal the emergence of new leadership. A descending triangle in the relative strength breakdown does not bode well for the sustainability of the Telecom Services recovery. Until its reverses back above the previous breakdown this sector is likely to continue to underperform peers. 16

18 S&P 500 Sectors Energy and Financials S&P Energy violated key support along the 2011 uptrend channel during Oct '14 at 650 setting into motion sharp declines across the entire sector. It is now approaching crucial support near coinciding with the 61.8% retracement from rally and most important, the pivotal 2009 uptrend. The ability to find support here may help to stabilize selling and generate an oversold rally to 600. S&P Financials continues with its intermediate term recovery as evident by its key breakout above intermediate term resistance along its 50% retracement (295) earlier last year. A subsequent successful test of the 2011 uptrend ( ) during Sep-Oct '14 correction can still lead to a retest of the 61.8% retracement (346). Key supports are: and then or the Oct '14 low and 2011 uptrend. Key support is visible at or the 61.8% retracement from rally and the pivotal 2009 uptrend. A confirmed breakout above the 50% retracement (295) from decline renders next target towards the 61.8% retracement at 346. Relative strength and MACD breakdowns confirm technical weaknesses and warn of further volatility. MACD and Relative Strength are challenging key resistances. Relative strength breakout of its 2012 downtrend channel has quickly reversed direction. A retest of the bottom 2-year downtrend channel is now imminent. Since the 2009 low, the relative strength trend has steadily improved. However, it still needs to surpass its intermediate term resistance near the prior 2011 breakdown to solidify the start of a sustainable outperformance cycle. 17

19 S&P 500 Sectors Utilities and Industrials S&P Utilities has been one of the strongest S&P sectors last year along with S&P Healthcare and Technology sectors. The Dec '14 rally has cleared above 2008 highs (225) and the top of the 5-year channel (236). This is a good proxy for lower US interest rates. An overbought condition may lead to a near-term consolidation and then higher prices to 273. Key initial supports - 236, and then S&P Industrials has broken out of 3 key resistances (450/381/337) corresponding to a prior high and uptrend channels. A positive outside week on 9/19/14 coupled with a breakout above its Jun 2014 high of has triggered a crucial test of the top of a 5-year uptrend channel (495). A breakout renders next target to as high as 631. Key supports are: ; , and S&P Utilities has successfully cleared above its 2008 highs at 225 and the top of its 2009 uptrend channel at 236. Major resistance resides along 495 or near the Dec 2014 highs and the top of the 2009 uptrend channel. Trading above its 2008 relative strength downtrend and 2001 MACD downtrend confirm key breakouts. A 5-year relative strength triangle pattern and a major MACD technical base have yet to be resolved. The strong relative strength over the past year is now approaching key resistance. near the pivotal 2009 downtrend. The MACD indicator is nearing major supply. A 5-year symmetrical triangle relative strength breakout late last year has not yet been confirmed as the recent sharp decline in relative strength during the summer to fall 2014 has resulted in a pullback to the bottom of the triangle pattern. 18

20 S&P 500 Sectors Healthcare and Technology The 2009 uptrend channel breakout in early 2013 has led to a steep 2-year uptrend channel. Despite the sharp rally in the past few years higher prices are possible as long as this sector maintain above its 10/30-week ma (798/751) as well as the bottom of its 2-year uptrend channel (750). A positive outside week on 1/9/15 hints of a impending breakout above or the top of its channel. S&P Technology continues to attract investors after a successful test of the key support along 610 +/- 10. A recent overbought condition has been alleviated and this consolidation now sets the stage for the next sustainable rally to the 76.4% retracement (795.51) and possibly to 100% retracement (988.49). Initial support moves up to coinciding with the 30-week ma and the Dec '14/Jan '15 lows. S&P Healthcare sector continues to trend higher via its 2-year uptrend channel. A positive outside week on 1/9/15 can lead to another breakout above the top of the channel at A key test of support at 610 +/- 10 during the Oct '14 correction has led to another rally to 676 or the 61.8% retracement from decline. Above this key supply renders a retest of the % retracement at (medium term) and then (long-term). Breakouts in both the Relative Strength and MACD reaffirm sector leadership The recent improvements in Relative Strength and MACD indicator confirm a broader Tech rally. This has been one of the better performing S&P Sectors over the past few years. The prevailing outperformance cycle can sustain as long as the Relative Strength and MACD continue to trend higher. Relative strength has been improving since Apr/Jul 2013 bottom. This recovery suggests investors continue to favor this economically sensitive sector. Nonetheless, a breakout above the bottom of channel is needed to signal the emergence of broad market leadership. 19

21 S&P 500 Sectors Materials and Consumer Discretionary A large 6-year triangle breakout (238) still renders an upside target to 420 (longer term) for the S&P Materials. However, we are concerned about the weakening relative strength. Failure to maintain its 2011 uptrend (295) and its May 2008 high (289.01) as well as the pivotal Dec '13 breakout (289) warn of a false breakout. S&P Consumer Discretionary fell in sympathy with the Sep-Oct ' % broad market correction. After briefly violating its 1-year uptrend channel at 507 it has quickly reversed back above the top of its channel (554) indicating the resumption of the primary uptrend and rendering next upside targets to Despite the recent strong selling in commodities the S&P Materials has held its key breakout at 289. However, we fear that this may be a false breakout. The consolidation over the past year has alleviated an overbought condition setting into motion the recent channel breakout downtrend breakout has failed to sustain. In fact, the sharp pullback over the past 8-months reaffirms weakness. Both of the Relative Strength (vs SPX) and MACD indicator are confirming breakouts signaling the reemergence of market leadership. Is the higher low pattern reversing? The relative strength has rapidly deteriorated in recent months and the 2012 downtrend breakout has reversed appears to have been negated. MACD indicator is also losing momentum and declining at a rapid pace. The dramatic decline in Energy prices over the past few months may have prompted the recent breakouts in Relative strength against SPX and MACD indicator. This hints of the resumption of market leadership within select Consumer Discretionary names. 20

22 % of S&P 500 Stocks at 52-wk Highs versus 52-wk Lows The declining trend of the % of S&P 500 Stocks at 52-wk highs indicator (15.40) has reversed direction in late-2014 resulting in a 2-year downtrend breakout. Does this breakout suggests domestic and global investors continue to favor the US equities market via buying of SPX. If the % of SPX stocks at 52-wk Highs indicator breakout above the low-30s does then imply a SPX target closer to 2,100-2,200? The % of S&P 500 stocks at 52-wk lows broke out of its 2-plus year downtrend during Oct This triggered one of the sharpest rally in recent years. Nonetheless, the sharp rally was not sustainable and the indicator has now slipped back toward its extreme lows near 0%. Trading above 2-3% is needed to reaffirm a breakout. In the meantime a trading range between 0-3% is likely, near term. 21

23 % of S&P 500 Stocks above 200-day MA and SPX/VIX The % of S&P 500 Stocks trading above its 200-day moving average (76.70%) has recovered from its recent 9.84% SPX price correction during Sep-Oct A successful test of the May 2012 low trigger current rally which is challenging key resistance along the convergence of the 2012 symmetrical triangle at A breakout can extend SPX price rally to the top of its uptrend channel (low 2,100s.) It appears the relatively low SPX implied volatility (VIX 17.01) has expanded over the past few months. However, it still remains confined to a 3-year wide trading range between on the downside corresponding to the 2013/2014 lows and coinciding with Jun '12/Dec '14 highs. If this new trading range develops further this would imply a more volatile market scenario for

24 % of NYSE Composite & DJIA stocks>200-day Moving Avg The US listed market as represented by % of NYSE Composite stocks above the 200-day ma (50.33) continues to deteriorate and is now considered one of the weaker US indexes probably due to its large exposure to foreign stocks, ADRs and tracking stocks. It needs to clear above the 1-sd (56.02) to signal a recovery. The blue-chip DJIA has begun to negatively diverge against many of its larger cap US counterparts probably because of a weakness of a handful of high priced DJIA names. The % of DJIA stocks above its 200-day ma (71.83) has suddenly reversed direction and is now testing its 1-sd (69.49) and Oct '13 and Aug '14 lows (69/70). 23

25 % of S&P 100 and NASDAQ 100 > 200-day Moving Avg. The Sep-Oct '14 correction has also impacted the high-quality mega cap US stocks. The % of S&P 100 (OEX) Stocks trading above its 200-day ma (74.40%) now shows a bearish descending broadening wedge pattern. A convincing move above the Sep '14 high (81) and preferably above the top of its wedge at 84 Is needed to reaffirm leadership. Key resistance for NDX resides near top of channel at We continue to favor the mega cap NASDAQ 100 Index as it has again emerged as a market leadership index as evident by the convincing breakout above its 2013 downtrend channel via the % of stocks above 200-day ma (81.85) indicator. This suggests a retest of the Oct '13 high (91) and possibly to top of 3-year channel (97). On a near term basis, NDX is overbought a trading range trend is now likely. 24

26 % of Mid-Cap and Small-Cap stocks>200-day Moving Avg. After leading the marketplace for the past 10-plus years the Mid-cap market may have peaked during summer 2013 as evident by a series of lower higher/lower lows. This indicates a loss of leadership and/or maturing trend. Failure of the % of S&P 400 Mid-Cap above 200-da ma (62.52) to clear above its Jun 2013 downtrend (70) and mean (71.34) as well as the lack of follow through to new price highs is negative. The sharp decline in small cap stocks reached extreme levels during mid-oct '14 as 29% of the index traded above its 200-day ma. This has promptly led to a technical oversold rally as evident by the sharp move from 29% to a current level of 62.89%. However, there is formidable resistance along the Aug '13 downtrend (66) and the mean (63.58). A broadening top pattern warns of further volatility. 25

27 Global Markets/QE Programs/9-inning Baseball Game Analogy End of the Game Bottom of the 9 th Inning (???) 8 th Inning? US Equities - SPX Index TARP - Troubled Asset Relief Program (10/08), QE1 (11/08), QE2 (11/10), Operation Twist (9/11), QE3 (9/12 and 1/13), QE3 Tapering announced (12/13), End of QE3 tapering (10/14) 5 th Inning European Equities MSCI EMU Index ECB LTRO program Long Term Refinancing Operation 2-stage program stage 1 (12/21/11) and stage 2 (2/28/12) 3 rd Inning Japanese Equities - Nikkei 225 Index Bank of Japan Kuroda and Prime Minister Abe Asset Purchase program (4/13), BOJ and Gov't Pension Fund Massive Stimulus move (10/14) 1 st 2 nd Inning Emerging Markets Equities - MSCI Emerging Markets Index 1 st Inning Frontier Markets Equities - MSCI Frontier Markets 100 Index Start of the Game (recovery) (3/09) 26

28 US Economic/Business Cycle, Sector Rotation & Duration Early Expansion Middle Expansion Services Technology Transportation Late Expansion Energy Basic Materials Capital Goods Industrials Early Contraction Consumer Staples Healthcare Utilities Financials Late Contraction Consumer Cyclicals March ? Early Expansion 12 to 18 months Inflation = Continues to fall Interest Rates = Bottoming out Middle Expansion 12 to 18 months Inflation = Bottoming out Interest Rates = Rising modestly Late Expansion 12 to 18 months Inflation = Rising Interest Rates = Rising rapidly Early Contraction 6 to 9 months Inflation = Rising less strongly Interest Rates = Peaking Deep Contraction 6 to 9 months Inflation = Flat to Declining Interest Rates = Falling 1 complete cycle 48 to 72 months or 4 to 6 years 27

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