h Technical Analysis Equities Sales Trading Commentary Global Michael Riesner Marc Müller 21/01/2014 michael.riesner@ubs.com marc.mueller@ubs.com +41-44-239 1676 +41-44-239 1789 SPX Trend Move Ahead Watch Gold and Gold Mines!! US Trading: Following our cyclical model we have been looking for another rally leg from our projected mid- December trading bottom into late December/early January, and with 1850 the SPX has exactly reached our next major target projection. In late November we said that despite the extreme bullishness in the market there would be one more rally missing before we could see a more significant setback into deeper Q1. The last breakout in the SPX was a low momentum breakout, which brought us the missing non-confirmation in our price indicators. The too bullish sentiment situation has not changed and together with non-confirmations in our breadth work and a rising wedge in transport we see the risk of a significant Q1 setback before resuming the underlying bull trend into summer. With sideways trading since late December, the SPX is in neutral position. As long as trading above its pivotal support at 1815 we cannot rule out a final overshoot towards 1860, whereas a break of 1815 would imply a short and potentially sharp decline towards 1772 and worst case 1730. On the sector front our cyclical plays banks, brokers and technology have hit new highs whereas the energy complex continued to underperform. In a potential Q1 setback we see the cyclical camp vulnerable, whereas defensives should bounce. US Strategy: Since the September breakout we have been saying that apart from short-term corrective pull backs the SPX would be bullish biased into end December/early January before we could see a more significant setback. Given the current setup we see the risk of a 5% to 7% setback into first half February before resuming the underlying bull trend. In the bigger picture we are sticking to our 2014 strategy roadmap and see the US market bullish biased into minimum summer with an SPX target at 1970 before we could see a more important market top forming. European Trading: From the mid-december trading bottom the outperforming DAX has reached our early January target projection at 9700 but driven by outperforming financials, new momentum in the periphery, and a still strong broader market, the rest of Europe has also hit new highs, which is a bit of a positive surprise but fits the bullish medium-term picture and the still healthy underlying momentum. Short-term, Europe is overbought. In our trading indicators we have non-confirmations forming and given the fact that we see the December/January rally as a wave 5 of a larger degree we also see Europe vulnerable for a short set back into deeper Q1 before resuming the underlying bull trend into summer. Inter Market Analysis: No surprises on the inter-market side. On track with our cyclical roadmap we see our anticipated Q1 pullback in the EUR; and after the October/December correction, the US bond market and the German Bund have hit our projected late December low as the basis for a tactical rebound. From a cross-asset class perspective we see both the US dollar bounce and the bounce in bonds moving into an important deeper Q1 top (Q1 low in risk) before resuming the underlying bear trend, which implies the risk of an overshoot in yields into summer. It is a key call of our 2014 strategy to expect a comeback in gold and gold mines. From a cyclical aspect we have been looking for a very early Q1 low as the basis for a corrective bear market rally, which particularly for gold mines can be very aggressive due to the historically oversold status. Last week, we saw initial momentum breakouts in gold mines, and gold is on the way of testing its breakout resistance at $1267. A break of this level would imply that a more important bottom is complete and call for an initial bounce towards $1320 to 1340. From a macro perspective, the current strength in metals mirrors the decline in interest rates. However, the real driver of a potential bear market rally in gold we expect to get from the AUD, which we see trading in the final stages of its October bear leg. Gold is already showing relative strength versus the new reaction low in the AUD, which implies the potential for a positive surprise in gold in case of seeing a bullish reversal in the AUD nearterm and into deeper 2014!! NOT FOR DISTRIBUTION INTO THE U.S. UBS 1
US Equity Market Update: Chart 1. ) S&P-500 Daily Chart Chart 2. ) S&P-500 Daily Chart Chart 3. ) S&P-500 Daily Chart with 10-Day CBOE Put/Call Ratio 1815 Key Support!! The US market was overbought in late November and our sentiment work has reached contrarian levels, which even in the historical context has reached extreme levels (multi-decade low in the Investor Intelligence). Following our cyclical model we were looking for just a minor pullback into mid-december before starting a classic year-end rally in which we expected the SPX to reach 1850 as our next major target projection in late December/early January, which could then bring us a potential more important tactical market top. In November we said that despite the extreme bullishness in the market there would be minimum one more high missing in the SPX since the late November high was a high momentum top, and no bull market or trend move ends in a high momentum top without forming the classic non-confirmation in our price indicators. This situation has changed. The December breakout in the SPX was a low momentum breakout, which now forms the divergences in our price indicators and this is something we can see in all key sectors that have reached our projected new highs (banks, brokers, technology, transport). The situation on the sentiment side has not changed. The CBOE put/call ratio is still at very low (contrarian) levels and together with non-confirmations in our breadth work (chart 4.) and a rising wedge in transport (which is a trend reversal pattern) we are sticking to our late 2013 call and continue to see the risk of a significant tactical setback in earl Q1 before resuming the underlying bull trend into summer. Conclusion: The SPX has more or less topped on December 31 st, and with trading sideways since late December (which has a potential distributive character), the SPX is actually in neutral position. The new pivotal support represents the last higher reaction low at 1815, which means as long as the SPX trades above 1815 we cannot rule out a final overshoot towards 1860, whereas a break of 1815 would imply that a more important tactical top is in place and in this case, which would call for a short and potentially sharp setback. Keep an eye on the very short-term ADX as a trend measuring tool, which we usually use as a contrarian indicator for detecting trend moves. This indicator has reached a very low reading, which implies that a trend move is not far away. So either we are completely wrong with our thesis of seeing a setback in early Q1 or this move will be significant. In this context, with a break of 1815 we see the risk of a setback towards 1772 and worst case 1730 into mid- February, before starting its next rally leg into early Q2. NOT FOR DISTRIBUTION INTO THE U.S. UBS 2
US Equity Market Update: Chart 4. ) S&P-500 with NYSE 52-Week Highs The picture on the breadth side has not changed. The top in market breadth in the US we had in May last year, where all the bond proxy themes topped out and with the recent breakdown in retail the breadth is further deteriorating. Furthermore, the last breakout in the SPX has led to a divergence in our trading indicators such as a number of SPX stocks trading above their 20-day moving average. Together with the non-confirmation in our price indicators this is tactically toppish!! Chart 5. ) Dow Jones Transport Daily Chart Drawing trend lines, interpreting patterns and wave counts can be subjective and can be a reflection of the overall market sentiment. Nonetheless, we think that the pattern and wave count in the transport sector are relatively clear and therefore objective. From a pattern standpoint we have a rising wedge forming, which is usually a trend reversal formation. From a wave perspective we think the bull cycle from the June summer bottom has been developing in a classic wave 5 pattern, which means this bull cycle should be to come to an end. If this call is correct we should see a significant setback/correction that could end a touch below 7000 -term followed by another rally into summer, where we could see another marginal new high or a re-test of the potential Q1 top. Chart 6. ) S&P-500 Weekly Chart In our 2014 strategy we said that despite the risk of seeing a significant Q1 setback it would be months too early to call a major market top. We still do not have any major divergence in sentiment indicators and from a trend perspective the 2013 bull trend was too strong to top out and reverse without seeing any major distribution let alone divergence in our upper timeframe price indicators. In the current setup we have multi non-confirmations on the daily time frame and our weekly trend work is just hitting a high momentum top!! Conclusion: We can see a tactical setback and this can be significant but as long as we don t have a bigger divergence forming in our weekly trend work it is too early to call a major top!! We are sticking to our 2014 strategy and expect higher prices into minimum summer and our preferred target for the SPX this year remains 1970 with the potential to finally overshoot. NOT FOR DISTRIBUTION INTO THE U.S. UBS 3
US Equity Market Update: Take Profits in Banks, Brokers and Technology! In mid-december we said we expected to see new reaction highs on the sector front in all recent outperformer sectors, which were banks, brokers stocks, CYC, SOX NDX, whereas in the underperforming energy complex we expected to see a weaker and corrective rebound, which in the oil service sector should just post a lower high versus its October/November double top. In the broker dealer index a final wave 5 was still missing (December 17 th weekly report). With the last rally leg the XBD has reached our price target and more importantly, with the new reaction high we have now a non-confirmation forming, which is the formal confirmation that a wave 5 of a larger degree is underway. The same picture we have in the Nasdaq Composite, in the SOX, and banks where we see bigger non-confirmations forming as a warning signal for a potential near-term pullback. In this context it is interesting to see the financial sector as a whole actually underperforming versus the SPX since late July; and with the current corrective rebound, the XLF is at risk of setting a significant lower reaction high versus its summer top, which would be bearish short-term!! We would take some profits in technology, banks and broker stocks short-term!! Key support in the XBD is at 158 and 70 in the BKX. Chart 7. ) Nasdaq Composite Daily Chart Chart 9. ) US Banks (BKX) Daily Chart Chart 8. ) Broker Dealer Index (XBD) Daily Chart Chart 10. ) XLF versus S&P-500 NOT FOR DISTRIBUTION INTO THE U.S. UBS 4
US Equity Market Update: Chart 11. ) S&P Materials Daily Chart Chart 12. ) Materials versus S&P-500 Materials Bullish versus SPX Whereas over the last 2 weeks the materials sector has lost some momentum versus the overall market it was the big rally in December that caused another important relative reversal and which forms a potentially bullish setup as part of a major basing formation of the materials sector versus the SPX. In case of seeing our anticipated overall market setback into first half February it is very likely to also see in materials further weakness, but it is actually the relative setup where the higher December low versus the summer relative low indicates that at the latest in deeper February we should see a significant relative breakout of materials versus the market, which would fit our bear market rally scenario for the AUD on the currency side and therefore also our anticipated bear market rally in the whole commodity space. Buy the dips!! New Momentum Breakout in DRG! Chart 13. ) US Healthcare (DRG) Daily Chart In the defensive camp we saw a big breakdown in retail; staples and telecoms continue to underperform, and in the utilities sector we see just a weak and corrective bounce in the DJU from its 2010 bull trend support. Against all these weak patterns the key outperformer sector in the defensive camp remains pharma, and after the recent rally it is likely to see more gains. After breaking its 2000 alltime high at around 440 the DRG has more or less exactly hit our next target projection at 465 and started a pullback from its November top. However, after this short pullback we got a new high momentum breakout in the DRG which is extending its 2012 bull trend. Short-term the healthcare sectors looks overbought and we could see a near-term pull back as part of our overall market set back scenario but given the recent strong momentum it is very likely to see more gains into later Q1 and/or early Q2. NOT FOR DISTRIBUTION INTO THE U.S. UBS 5
Inter Market Update: US Dollar and Bonds Corrective Q1 Rebound!! In the bigger picture, both the US bond market and the US dollar hit important long-term tops last summer. After a corrective September rebound we got another tactical sell signal in October in the US T-Bond and it was out view to minimum see a retest of the September bottom with risk to finally overshoot. The trade weighted dollar index has posted another lower high at 81.48 into early November as the basis for a re-test of the October bottom. Tactically, it was our view that both the US dollar and the US T-Bond would move into an important trading low in late December/early January as the basis for a corrective rebound into deeper Q1 before resuming its underlying bear trend. In this respect we saw no real surprises on the inter-market side since the Christmas break, which leaves our tactical road map unchanged. Conclusion: In early December we said that we see bonds moving into a late December tactical buying set up for a bounce into Q1 but we are sticking to our big picture view and see the current rally in bond and the bounce in the US dollar just as corrective rebounds within an intact medium-term bearish picture. Tactically we see both bonds and the US dollar moving into a deeper Q1 bounce top before resuming its underlying bear trend, so that into summer we continue to see a weaker US dollar (higher EUR) and a new litmus test in yields on the upside. Chart 14. ) Trade Weighted US Dollar (DXY) Daily Chart On track with our cyclical roadmap, the DXY hit an important higher low in late December and was able to defend its 79.90 support, which de facto means the DXY remains in its neutral position between its mid-november top at 81.48 and its October low at 79. Short-term we have a momentum divergence forming, which implies a pullback this week but all in all we cannot rule out another test on the upside into mid-february before starting its next down test into Q2. We would see a break of 81.48 as only a fake to wash out short positions with risk to overshoot towards 81.90 to 82.50. A break of 79.90 would be bearish and imply that a new bigger US dollar down leg is underway!! Chart 15. ) EURUSD Daily Chart The EUR is pulling back from its overbought late December levels but the move is so far corrective, which means underlying bullish and this call remains intact as long as the EUR does not break its key support at 1.33. All in all we cannot rule out more consolidation into deeper February and worst case March but looking at our cyclical models we would expect the next bigger rally to start at the latest in later Q1 into summer and a break of 1.3840 would be underlying bullish. NOT FOR DISTRIBUTION INTO THE U.S. UBS 6
Inter Market Update: Chart 16. ) US T-Bond Daily Chart Chart 17. ) US 10-Year Treasury Yield Weekly Chart Chart 18. ) Bund Future Daily Chart Q1 Rebound in Bonds Underway! From its October rebound top we have been looking for another down leg in the US T-Bond and after a temporary break of its September bottom the T- Bond has reached our late December target at 128 as our anticipated tactical buying opportunity (see December 3 rd weekly report). From a wave perspective we have seen the recent down leg as a wave 5 of a larger degree, which has been confirmed by divergences in our daily trend work as well as we have a bigger weekly divergence in place in the Treasury yield chart. All this implies that the late December low is an important tactical bottom, which means we can expect more gain mediumterm. From a cyclical perspective our call and roadmap is unchanged and we expect a corrective rebound into deeper Q1 if not even into early Q2 before we should see US and European bonds moving into its next bigger tactical top. From a price perspective we expect the T-Bond to reach a target range at 136/137.50 to best case 140 (which is maybe a bit too aggressive). On the yield side we expect a pull back in the 10-Year Treasury to its broken 2007 bear trend at 2.30% before starting the next leg up. Our big picture view is unchanged. Tactically we see the US and the European bond market moving into an important top at the latest in early Q2 as the basis for another litmus test on the downside into summer. The whole rebound structure in the German Bund is just corrective. After the November breakout above its 2013 downtrend we said that during a November/December set back the bund would have good support by this broken trend into a potential late December trading bottom. At the end of the day we see the October/December decline as a corrective wave B, which implies that the current rally in the German Bund represents wave C, which should bring us a very important top in later Q1 or at the latest in early Q2 as the basis for a new major down test into summer. In our 2014 strategy we said that the higher this bull market in equities goes and the better the news flow in the economy will be the more pressure we will have on yields moving higher into summer and at a certain point too high yields will start biting risk. NOT FOR DISTRIBUTION INTO THE U.S. UBS 7
Inter Market Update: Gold Mines Breaking Out Trend Move Ahead in Gold! It is a key call of our 2014 strategy to expect a comeback in gold and gold mines. From a cyclical aspect we have been looking for a very early Q1 low as the basis for a corrective bear market rally, which particularly for gold mines can be very aggressive due to the historically oversold status. Last week, we saw initial momentum breakouts in gold mines, and gold is on the way of testing its key breakout resistance at $1267. A break of this level would generally imply that a more important bottom is complete but the momentum in gold mines (which are usually leading) and the relative strength of gold versus the still weak AUD and the US dollar bounce implies that it s just a matter of time to see also gold breaking its key levels, which would imply a first rally leg into deeper February towards initially $1320 to 1340. Into later summer we expect a price target at $1470 to best case $1550. From a macro perspective, the current strength in metals mirrors the decline in interest rates. However, the real driver of a potential bear market rally in gold we expect to get from the AUD, which we see trading in the final stages of its October bear leg. Gold is already showing relative strength versus the new reaction low in the AUD, which implies the potential for a positive surprise in gold in case of seeing a bullish reversal in the AUD near-term and into deeper 2014!! In this context it is interesting to see the ADX indicator as a trend measuring tool is currently at very low readings, which generally implies that a tend move in gold is not far away. Given the overall set up and a fresh weekly buy signal in the XAUEUR we expect a breakout on the upside underpinning our comeback scenario for gold and gold mines this year. Chart 19. ) Gold Daily Chart with ADX Indicator Chart 21. ) Gold versus AUDUSD Chart 20. ) XAUEUR Weekly Chart Chart 22. ) AUDUSD Daily Chart NOT FOR DISTRIBUTION INTO THE U.S. UBS 8
Inter Market Update: Chart 23. ) AUDUSD Weekly Chart Similar to XAUEUR we also in the AUDUSD on a weekly basis a bigger divergence forming as the set up for forming a major price bottom as the basis for our anticipated bear market rally into deeper summer. Worst case is a test of 0.85, which is the 50% retracement of the 2008/2011 bull cycle. Chart 24. ) Gold Bugs Index (HUI) Daily Chart In late December we saw initial breakouts in gold and gold mines but the real momentum breakout in gold mines and junior mines we actually saw only on Friday. With the significant break of 206 the gold bugs index has completed a major price bottom, which we see as a leading indicator for the break of the still intact bear trends. Next targets/resistance in the HUI we have at 225/236. In the bigger picture we expect a bear market rally towards 290/300 in 2014!! Buy the dips!! Chart 25. ) Market Vector Junior Gold Mines Daily Chart A similar picture we have in the Junior gold mining sector, where last week we saw a big rally. After completing a text book double bottom the Market Vector for junior gold mines has broken its 23% retracement of the August/December bear leg. Short-term, the sector is overbought and we can see a pull back but all in all we expect more gains towards 38 to 41 as a next target. Buy the dips!! NOT FOR DISTRIBUTION INTO THE U.S. UBS 9
European Equity Market Update: Europe Overbought and Hitting Resistance. From our projected mid-december trading bottom we expected another rally into year and/early January. In December it was in particularly the periphery as well as the SMI and FTSE-100 that were oversold and due for a significant bounce. However, whereas for the outperformer markets such as DAX, OMX and AEX we expected to see new highs into early January we actually thought just to see a re-test of the November tops in the underperformer market. Fact is that outperforming DAX has reached our early January target projection at 9700 but driven by outperforming financials, new momentum in the periphery, and a still strong broader market, the rest of Europe has also hit new highs, which is a bit of a positive surprise but fits the bullish medium-term picture. Short-term, Europe is overbought. In our trading indicators we have non-confirmations forming. Form a wave perspective we see the December/January rally as a wave 5 of a larger degree and the Euro Stoxx-50 as well as other markets (Stoxx- 60 and FTSE MIB) are facing resistance by their broken July bull trend lines, which should actually cap Europe on a shortterm basis. In this context we also see Europe vulnerable for a short set back into mid February before resuming the underlying bull trend into summer. All in all the underlying momentum in Europe is still healthy and this suggests higher prices medium-term. Chart 26. ) Euro Stoxx-50 with Stocks above 20-Day Moving Average Euro Stoxx 50: Our projected mid-december trading low was the basis for the expected rally into year-end/early January. Our upper price target was met last week and all in all the rally last longer than initially favoured. Despite the extension in terms of time, the Euro Stoxx 50 has hit its significant 50% retracement of the 2007-2009 bear cycle at 3170 and so far this level has turned out to offer resistance. With the broken June 2013 trend we have another important short-term resistance at around 3200 in sight. Together with a momentum nonconfirmation the tactical situation is short-term toppish. To confirm a trading top, a daily close below 3131 is required and this would call for a test of the last significant low at 3055, which defines the objective key support. Chart 27. ) FTSE MIB Daily Chart FTSE MIB: In mid-december the periphery was oversold and we highlighted the FTSE MIB testing its key support at 17740, which e anticipated to be the basis for our expected year end rally. At the end of the day the momentum of the recent rally was a surprise to us and the FTSE MIB has hit a new reaction high, which is generally bullish long-term. However, short-term the market is overbought. The FTSE MIB is heading into resistance with the round number of 20000 and the broken June 2013 bull tend, which we see as a cap for the market and the basis for corrective set back into deeper Q1 before resuming the underlying bull trend into Q2/summer. NOT FOR DISTRIBUTION INTO THE U.S. UBS 10
European Equity Market Update: Chart 28. ) FTSE-100 Daily Chart FTSE-100: Similar to the previous trading troughs, the last set back into our mid December buying opportunity found its low around its 200 day moving average. With the current rally the FTSE-100 is approaching its May 2013 high at 6875, which almost coincides with the all-time high from 2000 at 6950. We see technical and psychological resistance at 6875/6950, which should cap the market short-term and in the context of our overall market view we favour a corrective pull back into deeper Q1 before starting the next bigger breakout move on the upside, which could be finally successful due to gaining strength in the mining sector, that could further push the FTSE into summer. Key support is defined by the last minor trading low at 6679. Chart 29. ) DAX-30 Daily Chart Chart 30. ) Swiss Market Index Daily Chart DAX-30: The DAX remains among the outperforming markets within Europe and with hitting a new reaction high the market has factually met our 9700 early January price target. Similar to the pictures in the rest of Europe, with the recent rally the market looks short-term toppish and from a wave perspective the rally from the mid December low has a wave character of a larger degree, which implies a) the market is capped short-term and b) vulnerable for a more significant corrective set back before starting its next bull cycle. Minor support is at 9620 and a break would be initially negative. The objective key support is defined by the last reaction low at 9367 and a break of this level would confirm that a more significant set back is underway with target 9000 into deeper Q1 Swiss Market Index: Thanks to an outstanding market breadth, and a comeback of the market heavyweights as well as a rally in financials we have seen a surprisingly strong rally off from the projected mid December low. The consequence of the rally in large caps is a break of the May top at 8411, which is a game changer. Short-term the recent rally has an exhaustive character and the market is overbought, which implies the risk of a corrective pull back. However, even if we were to see a pull back short-term, any nearterm top is a high momentum peak, which implies more strength further down the road. The next major resistance/price projection is at 8750/8800. Key trading support is the last breakout level at 8411 and a re-break would call for a set back towards the 8200 area. NOT FOR DISTRIBUTION INTO THE U.S. UBS 11
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