Technical Analysis. Weekly Comment. Global. SPX Overbought Relief Rally in Europe!! Equities Sales Trading Commentary

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1 h Technical Analysis Equities Sales Trading Commentary Weekly Comment Global Michael Riesner Marc Müller 03/07/ SPX Overbought Relief Rally in Europe!! US Trading: On the back of the EU summit, equities rallied sharply and the SPX broke its last reaction high at 1358, which brings our extended 1370/1390 bounce target (June 19 th weekly report) back on the agenda. The overall technical setup has not changed. After completing an impulsive wave structure into early June the price structure of the current bounce remains corrective. In early June the bullish divergences in our trading indicators were the basis for the current bounce. Last week the NYSE McClellan Oscillator reached overbought extremes, which in the past has correlated to significant tactical tops!! On a very short-term basis last week s rally can still extend towards 1370 to 1390 but we are sticking to our comment from last week. Regardless of the complexity of any near-term bounces we continue to expect renewed weakness into deeper July. Given the fact that the current bounce lasts longer than initially favored a new potential down move may even extend into August before the next significant tactical bounce/rally starts. Following the current intraday structure we expect an important trading top later this week, at the latest next week. We would use strength to sell rather than chasing the SPX on the upside. US Strategy: Our long-term view is unchanged. On track with our cyclical road map, the October rally topped out in March and the SPX has started a new bear/correction cycle. Looking at our indicator work and inter-market correlations we have no evidence that the early June low at 1266 represents an important medium-term bottom. From a cyclical perspective, we continue to expect a significant down test into later July/first half August followed by another rebound into later Q3. However, with a fresh monthly short signal in place the risk is that a potential July/August low will be again just tactical in nature followed by more weakness into Q4 and/or early Q So at the end of the day the current correction cycle could get more complex than initially favored. European Trading: With the aggressive rally after the EU summit and by anticipating a rate cut by the ECB the current bounce in Europe is extending in price and time. After breaking important resistance levels the major headline indices are heading towards their next resistances/targets (Euro Stoxx 2330/2348, DAX 6558/ FTSE 5700). Nonetheless, despite the impressive rally the internal structure of the rebound remains corrective, which suggests we are currently trading in wave c of a classic a-b-c counter rally. So although the current bounce is going higher than initially favoured we are sticking to our cautious medium-term view. Following our cyclical roadmap we expect the current bounce to top out later this week, at the latest next week, followed by renewed weakness into late July and/or first half August. However, given that the current rebound is going higher than favoured and looking at the impressive rally in several key sectors it is highly likely that a potential set back into July/August produces a higher low, followed by another bounce attempt before we should see more weakness into deeper Q4. Inter Market Analysis: On Friday we saw an aggressive risk on rally and the DXY is challenging its June 17 th reaction low. We can t rule out a temporary break of but we wouldn t see this as a major reversal. The structure of the current US dollar pullback is corrective and following our cyclical roadmap we expect a new dollar rally starting from an early July low into at least late July or first half August. Crude oil has broken its steep May down trend and following our last week s call we see this as the beginning of a broader basing process. A break of 85 would call for 90. Into later July and/or August we expect a re-test of the recent lows, which we can apply on the whole commodity complex. The German Bund has been pulling back over the last 4 weeks and with generating a sell signal in our weekly trend work we have formal confirmation that a major top is in place. However, on a short-term basis the Bund is oversold, so that later this week at the latest next week we expect a new rally attempt to start, which should fail to make a new high. NOT FOR DISTRIBUTION INTO THE U.S. UBS 1

2 US Equity Market Update: Chart 1. ) S&P-500 Daily Chart with NYSE McClellan Oscillator Chart 2. ) S&P-500 September 60 Minute Chart Chart 3. ) S&P-500 with TIPS versus 10-Yaer Treasury Spread Momentum Toppish!! Last week the US market was oversold short-term and we expected another bounce attempt as part of the current corrective countertrend rally. With the aggressive rally on the back of the EU summit the new bounce leg has been extending and the SPX closed above its last reaction high at From a pure price point of view this cements a higher low and we had a lot of clients asking whether this would change our underlying scenario of expecting more weakness into later July. Given the high readings in our momentum work, last week we said that regardless of the complexity (in case of a positive surprise and extending the current bounce) of any near-term bounce, we would continue to expect renewed weakness into at least later July. With the Friday rally, the NYSE McClellan Oscillator has reached overbought extremes and in the last 2 years such levels were highly correlated to important tactical tops. After completing a bearish wave 5 structure into early June the current rebound has so far a purely corrective character. After an impulsive wave A, the SPX future (chart 2.) pulled back to 1303 from which we see another impulsive wave structure forming, in which a wave 4 and a final rally (wave 5) would still be missing to complete the whole rebound. During the Q1 rally we highlighted several indicators on the inter-market side, which have either not confirmed the rally or showed bigger non-confirmations. Traditionally, there is a high correlation between inflation expectations and risk rallies. In Q1 we had a big divergence between the SPX and this indicator, which questioned the sustainability of the move. Since the March top in the SPX the inflation expectations (the spread between TIPS and 10-year Treasury) are trending down and the current bounce is again not confirmed by this key indicator, which is structurally bearish! Again saving the financial system and banks is one thing but does this have a direct impact on the economy? Conclusion: On a very short-term basis, last week s rally can still extend and the break of 1358 brings our extended bounce target at 1370 to 1390 back on the agenda (June 19 weekly comment). However, given the corrective charter of the move and the overbought momentum indicators, we would use strength to sell rather than chasing the last 30 to 40 SPX points. From a timing standpoint we expect a market top later this week, at the latest next week. Given the fact that the current bounce is lasting longer than initially favored a new potential down move can extend into August before the next significant tactical bounce/rally starts. NOT FOR DISTRIBUTION INTO THE U.S. UBS 2

3 US Equity Market Update: Chart 4. ) Housing (HGX) Daily Chart Energy Bouncing The housing sector has been trading sideways since the March top and with its daily trend work pulling back to neutral level the whole consolidation had a quite constructive behavior. On Friday the HGX took out its key resistance at 132 and as long as the sector does not negate this breakout (on a daily closing basis) the sector remains bullish biased with a next target at 145, which represents the 38% retracement of the 2005/2009 bear cycle. Chart 5. ) DRG Daily Chart Since the March top in risk we have several times highlighted the outperforming healthcare sector and despite the May sell off the overall trend set up in the DRG remained bullish. Yesterday the DRG broke its March/May double top, which is actually bullish. However, on a short-term basis the sector is becoming overbought and with heading into trend resistance at 355 we expect the current rally to be increasingly limited. Chart 6. ) OSX Daily Chart Last week we highlighted the oil service sector as a bounce candidate after reaching the lower end of its relatively steep March bear trend. With the bullish Friday candle, the OSX is targeting 205 as a first important resistance. A failure would call for a new down test as part of a broader basing process, whereas a break of 205 would call for an extension of the current bounce towards 215. NOT FOR DISTRIBUTION INTO THE U.S. UBS 3

4 Inter-Market Analysis: US Dollar Pullback Just Corrective Sell AUD! On Friday we saw an aggressive risk on rally and the DXY is challenging its June 17 th reaction low. We slightly adjust last week s call as can t rule out a temporary break of 81.20, but given the corrective structure of the current pattern we wouldn t see this as a major reversal. On the contrary: The new reaction high in the AUD has not been confirmed by our trend work and also the pattern in the Rouble looks pretty much corrective and therefore trend continuation bullish for the US dollar. Keep in mind, in early June we highlighted the toppish trend momentum in the Rouble after the massive bear run. The ADX indicator is back to its extreme lows (below 20), which suggests the risk of another trend move is increasing. From a pattern standpoint and looking at our cyclical models we favor another move higher, and if so the move should meet to before we could see a more significant pullback. Conclusion: On a short-term basis the US dollar is getting increasingly oversold, which means 1) we do not see the current weakness as a reversal and 2) the current pullback should be limited in price and time. From a cyclical standpoint we expect another US dollar bull leg starting from a low later this week/at the latest next week into late July/first half August. Generally, from a macro perspective it is important to understand that as long as inflation expectations are not picking up (see chart 3.) we are obviously trading in an intact deflationary macro environment and this is structurally bullish for the US dollar. In this context we continue to think that at least one more bull leg in the DXY is missing, which should translate into a wave c versus the SGD (target 1.35), which was and still is a key call of our 2012 strategy before starting the next US dollar bear leg into Chart 7. ) DXY Daily Chart Chart 9. ) Rouble Daily Chart Chart 8. ) AUD Daily Chart Chart 10. ) SGD Weekly Chart NOT FOR DISTRIBUTION INTO THE U.S. UBS 4

5 Inter-Market Analysis: Basing Process in Commodities Commodities were among the weakest assets during the May sell-off and in this context it is not a real big surprise that after the EU summit we saw an aggressive relief rally in the commodity area. Crude oil bounced more than 7% and we saw also big moves in copper, gold and in soft commodities. Last week we have highlighted a bullish divergence in crude oil as the potential basis for a first bounce. With the Friday rally crude oil has broken its steep May down trend, which, according to our last week s call, we see at least at the beginning of a broader basing process and it is a pattern that we can apply on the overall commodity spectrum. In the precious metals area silver is testing its March down trend at$28. After posting a bullish divergence in our daily trend work the likelihood is high that silver break this trend, which we would see as the beginning of a broader basing process. Again, as long as the CRB Reuters Jeffries (chart 12.) does not break we continue to think that the CRB currently trades in counter trend wave 4 of its corrective wave C and from a cross-asset class perspective the setup is pretty clear. If we were to really see renewed US dollar strength this would obviously translate into at least one more down (wave 5) leg in commodities, which we would see as part of a basing process instead of panicking and eliminating commodity holdings into this potentially final down leg. Chart 11 ) Crude Oil Daily Chart After last week s bullish divergence crude oil rallies aggressively and is testing its first important resistance at $85. A break of $85 would call for $90 before we expect a re-test of the recent lows into later July and/or August. With a failure at $85, the likelihood would increase that into late July we could see a test of $75. Chart 12. ) CRB Reuters Jeffries Daily Chart NOT FOR DISTRIBUTION INTO THE U.S. UBS 5

6 Inter-Market Analysis: Chart 13. ) Gold Daily Chart Chart 14. ) XAUEUR Daily Chart Gold: The setup in gold remains constructive. After the pull back to the broken March trend gold is bouncing and by anticipating a rate cut by the ECB we can expect this bounce to continue into later this week. The key level on the upside remains $1662 and as long as trading below 1630/1662, the yellow metal remains vulnerable for another pull back and/or potential final move down into later July before we should see more strength. EUR denominated gold continues to look quite constructive. The June consolidation pattern has a bullish trend continuation character and today gold is testing the downtrend of this pattern. A break of 1280 would be bullish suggesting that a test of the strategic breakout resistance at 130 to 1320 would be underway. Chart 15. ) Silver Daily Chart Silver: Keep an eye on silver. After last week s successful test of its key support at $26.50 silver is testing its March down trend at $28. The last reaction low has not been confirmed by our indicator work, which represents a bullish divergence, so the likelihood to break $28 is in our view high. If so, we are looking for a first target at 30, before we could see a pull back starting into later July as part of a bigger bottom building process. NOT FOR DISTRIBUTION INTO THE U.S. UBS 6

7 Inter-Market Analysis: Major Top in Place in Bunds But Tactically Oversold! In early June we highlighted the historical extreme momentum in the Bund Future as a warning signal for a first reversal as part of a bigger top building process. In our June 12 th weekly report we reiterated this call and discussed the forming divergence in our weekly trend work in the US T-Bond as well as in Bund Future as the ultimate confirmation that a more important top is underway. With the last 4 weeks of a correction, the weekly MACD model in the Bund has turned short, which we see as the formal confirmation that on June 1 st the Bund hit an important long-term top at However, on a short-term basis the Bund future is getting increasingly oversold and with our daily trend work hitting oversold levels we shouldn t be too far away from starting a tactical rally/bounce, which however should fail to make a new high into late July and/or first half of August. On Friday the Bund Future successfully tested its 62% retracement of the March/June bull leg at , which is an important support and a potential low for our anticipated short-term rebound. With yesterday s move the bund is testing first breakout resistance at Target of the rebound should be to A break of the latter would imply a re-test of the early June high, which can be only justified if we see a new massive macro event in Europe. Chart 16. ) Bund Future Daily Chart Conclusion: It was a key call of our 2012 strategy to see an important yield low (Bund Future high) in deeper summer and with a completed major divergence in our weekly trend work and a monthly reversal candle in place we have growing evidence that this top is in place. Tactically this means that any kind of rebounds on a daily basis should be used to sell and this call remains in place as long as the Bund does not break its June 1 st reaction high of !! Chart 17. ) Bund Future Weekly Chart Chart 18. ) Bund Future Monthly Chart NOT FOR DISTRIBUTION INTO THE U.S. UBS 7

8 European Equity Market Update: Impressive Rally In Europe With the aggressive rally after the EU summit the current bounce in Europe is extending and the move is certainly stronger than initially favored. Driven by financials the Euro Stoxx broke its obvious key resistance at 2200, which opened the door towards 2330 to The DAX has broken 6450 and is heading towards its next resistance at 6558 to Following the positive tailwind of the EU summit and with the market anticipating a rate cut from the ECB on Thursday we can expect Europe to outperform the US on a very short-term basis. However, the price structure of the early June rebound/rally remains in our view corrective, which means although the current move is surprising on the upside we continue to think that the move is just a counter trend rally within a larger corrective bear cycle. Conclusion: Following our cyclical roadmap we expect the current bounce to run out of steam later this week, at the latest next week, followed by renewed weakness into late July and/or first half August. In early June we said that the break of the steep May bear trend in the periphery and the Euro Stoxx-50 was at least the beginning of a basing phase, in which we can t rule out new lows into July/August. This kind of significant set back is getting unlikely as the basis for a new set back into August is much higher than previously favoured and the picture on the sector basis has been improving significantly. Generally, with the improving picture in key sectors we do not see the potential to make new lows in the headline indices unless we are seeing a new melt down in financials, which after the EU summit is probably off the table for at least the next few weeks. Whereas the picture in most cyclical sectors is still corrective (basic resource, energy, industrials, autos) we have a strongly improving picture in insurance, telecoms, utilities and construction. So what does all this mean? If we are correct in getting a new tactical down leg into later July and/or into August it is very likely that this move produces a higher low from which we can expect to see a new bounce attempt starting. This in consequence means that further strength is in our view more an opportunity to sell instead of chasing the market on the upside. Chart 19. ) Euro Stoxx-50 Daily Chart Chart 20. ) STOXX-600 Daily Chart NOT FOR DISTRIBUTION INTO THE U.S. UBS 8

9 European Equity Market Update: Chart 21. ) FTSE-100 Daily Chart FTSE-100: With breaking 5600 the FTSE is also breaking its March down trend. Next target is 5700, which is the 62% retracement of the March/June bear cycle. With getting increasingly overbought it will be interesting to see whether during a potential pull back the market will be able to hold its last breakout level at If not, it would be short-term bearish and call for at least a re-test of the last reaction low at Chart 22. ) DAX-30 Daily Chart DAX-30: Last week we highlighted the deteriorating relative picture of the DAX versus the MSCI World and other core European markets. Despite the strong rally, from a relative perspective this picture has not changed. With the break of 6450 the DAX is heading towards its next resistance at 6558 and With getting increasingly overbought we favour a top building process starting near-term, followed by a significant set back into late July. Chart 23. ) Swiss Market Index Daily Chart Swiss Market Index: Following the strong bounce in European equity markets the SMI has broken the former neckline of its March/May top at 6050, which is bullish. However, with getting increasingly overbought we see further upside to be increasingly limited with a next target at Sell into strength! NOT FOR DISTRIBUTION INTO THE U.S. UBS 9

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