h Equities Sales Trading Commentary Technical Analysis Weekly Comment Global Michael Riesner Marc Müller 24/02/2015 michael.riesner@ubs.com marc.mueller@ubs.com +41-44-239 1676 +41-44-239 1789 SPX Minor Top Underway Gold Near to Bottom!! US Trading: In our cyclical model, the break of the internal resistance at 2064 in early February was the trigger for starting a major breakout campaign in the SPX, and as a consequence we said that a break of the pivotal late December high at 2093 would be very likely as a medium-term game changer in our cyclical model. In mid-february, the SPX broke 2093, last week the Russell-2000 hit a new all-time high, and on the back of a healthy breakout in cyclical key sectors we got the ultimate confirmation for triggering a new medium-term long signal in our cyclical model. Having said that, on a short-term basis, the US market is overbought and with trading in the time window of a minor top projection, we continue to expect a near-term pullback later this week and into next week before starting the next move higher. On the upside the next minor resistance is at 2112 and 2125. A re-break below 2093 would be short-term negative and imply a pullback towards 2060 into ideally next week, where we have the next minor low projection for starting a new bounce into mid-march. As we said in our recent technical alert, we do not expect to see a great momentum breakout/market breadth over the next few weeks/months so that timing and sector rotation remains at the top of the agenda. In this context we argue against chasing the market on current levels and would wait for a pullback to buy/add. On the sector front we expect a pull-back in cyclical themes but from a trend perspective we remain bullish cyclicals into Q2. US Strategy: The December 29 th high at 2093 was an important medium-term high in our cyclical model. Although it was not our favored tactical scenario, the break of 2093 triggered a new long signal in the SPX into the May/June time window, which de facto suggests an extension of the underlying 2011 bull cycle into early summer. As we said over the last two weeks, it remains a high conviction call of our 2015 strategy to see a larger 15% to 20% correction, which from an Elliott Wave perspective should correct the 2011 bull cycle before resuming the underlying long-term bull market into H1 2016. The break of 2093 negates our previous timing and implies a shift of a potential correction into summer. It also suggests that, apart from any near-term pullbacks and as long as the SPX trades above 1980, the reflationary trade on the macro side remains intact into early summer before we expect a comeback of the underlying deflationary trend. European Trading: In early January we highlighted the high momentum breakout in absolute and relative terms (versus the US market) as the big game changer for Europe. Together with a broad based breakout of the periphery (versus MSCI World) and cyclical sectors as well as a new momentum high in our breadth indicators, this remains bullish for Europe medium-term. However, on a short-term basis, Europe is extremely overbought and the sentiment is too bullish/complacent. Pattern-wise, the FTSE-100 is trading in a rising wedge, which is toppish. From a wave perspective we see the Euro Stoxx close to completing an impulsive wave 3, suggesting the risk of a short but potentially significant setback to its last breakout level at 3320/3300 next week. Tactically, we would use strength to take profits. Sector-wise, we expect a pullback in the overbought cyclical themes before starting the next bounce higher. Inter Market Analysis: The US dollar continues to trade sideways and remains in a neutral position. Tactically, the early February low at 93.25 remains the critical support with far reaching consequences on the macro side. A break of the February 3 rd low would trigger a tactical short signal in our cyclical model, and suggest US dollar weakness into April before resuming the underlying bull trend into Q2, whereas a break of the late January top at 95 would be immediately trend continuation bullish. A US dollar pullback would imply a stronger rebound in commodities and Emerging Markets. However, as long as we do not see this signal it is too early to get aggressively bullish on these themes. In late January we anticipated a pullback in gold and gold mines into first half February before moving higher into March/April. The pullback in gold is stronger and lasts somewhat longer than anticipated but we continue to expect strength into March, where we will get more clarity about the medium-term picture of the yellow metal. Asian Corner: Tracking the breakout in the SPX, the Nikkei broke its December high, and with an intact healthy momentum on the breadth side and banks having broken their 2013 underperformance trend the underlying trend in Japan remains bullish. However, short-term, the Nikkei-225 is overbought and we expect a pullback but any near-term weakness we would still see as an opportunity to buy/add. A break below 18000 would be short-term negative and suggest the risk of a pullback to 17400. 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. ) Nasdaq Composite Daily Chart Minor Top This Week!! In early February, we highlighted the internal resistance at 2064 in the SPX as an important technical trigger. In our February 3 rd report we said the break of this level would negate the immediate downside risk of our suggested Q1 correction scenario, and in this context 2064 should be used as a stop loss trigger for tactical short positions. In our February 10 th weekly report we reiterated this call and said that following our cyclical model, a break of 2064 would be short-term bullish. Looking at the breakout setup in several key sectors (Russell-2000/SOX) it would be very likely to see a break of the pivotal late December high at 2093, which would negate at least the timing of our 2015 correction scenario. Again, it remains a high conviction call of our 2015 strategy to see this year a short but sharp correction before resuming the underlying long-term bull market into 2016. Tactically, the break of 2093 is in our view just an extension of the 2011 bull cycle (wave 3 of a larger degree) and it therefore shifts our correction scenario into summer but it does not negate the whole correction call. On February 13 th, the SPX finally broke 2093, last week the Russell-2000 hit a new all-time high and we saw a broad based breakout of the cyclical camp in absolute and relative terms, which is bullish and the formal confirmation for triggering a new mediumterm long signal in the SPX with the next potential top projection in late May/early June. Tactically this suggests that, apart from any minor pullbacks and as long as the SPX trades above its last higher reaction low at 1980 (new pivotal support!!), the reflationary trade in the market remains intact into early summer before we expect a comeback of the underlying deflationary trend. Conclusion: Medium-term the break of 2093 is bullish SPX, but on a very short-term basis the US market is overbought. Following our cyclical model, we continue to see the market heading into (February 13 th Technical Alert) a minor trading top as the basis for a pullback into a trading bottom later this week and/or next week as the basis for a new bounce. As we said in our technical alert, we do not expect to see a great momentum breakout or a new momentum spike in market breadth over the next few weeks/months so that timing and sector rotation remains at the top of the agenda. In this context we argue against chasing the market on current levels and would wait for a pullback to buy/add. A re-break below 2093 would be short-term negative and imply a pullback to 2060. Into mid-march we expect to see another bounce attempt, where cyclical sectors should continue to outperform. NOT FOR DISTRIBUTION INTO THE U.S. UBS 2
US Equity Market Update: Chart 4. ) S&P-500 Weekly with AAII Bullish Consensus Chart 5. ) S&P-500 with VIX Index Chart 6. ) S&P-500 with 10-Day CBOE Put/Call Ratio Sentiment Toppish! Despite the new breakout in the SPX and the rotation into cyclical sectors, the underlying non-confirmation in most of our technical key indicators remains intact, which is a) tactically toppish and b) it is important for our big picture call, since in terms of market structure this is still the confirmation that the US market is on the way into a more important top. Relief in this respect we would only get if, for example, we were to see a high momentum sentiment spike and/or a new momentum spike in market breadth. If so, it would definitely be a huge improving factor for the market and would then also negate our correction scenario. However, as long as we do not see a breakup of all these divergences in our sentiment and in our market breadth indicators, this remains a warning factor. In more or less all our sentiment studies (Investor Intelligence, NAAIM and the AAII Bullish Consensus) we have a bigger sentiment divergence in place, which is structurally toppish. The picture on the volatility side is also unchanged. Despite the recent decline, the divergence that has been forming in VIX index versus the SPX is still intact! Tactically it is important to highlight that the new breakout in the SPX was the ultimate trigger of the capitulation of the bears via a strong decline in the CBOE put/call ratio. As always, it is the violation of certain levels (support and resistance) that is usually the trigger for a significant washout in positioning. With the recent rally, a lot of the short positions have been washed out, which effectively means that the market is now in a position where it is vulnerable for a negative surprise, wherever this surprise comes from. NOT FOR DISTRIBUTION INTO THE U.S. UBS 3
US Equity Market Update: Chart 7. ) S&P-500 with NYSE 52-Week Highs Chart 8. ) Russell-2000 versus Russell Advance/Decline Line Breadth Remains Weak! Despite the internal rotation and the relative breakout of cyclical sectors, the market breadth remains the Achilles heel of the market. The tactical picture is unchanged to what we saw last year. The recent new breakout in the SPX was again accompanied, but with just a very weak expansion in new 52-week highs at the NYSE. This effect certainly has to do with the correction in the US bond market and related themes. However, if we look at the core market segments such as the SPX and/or the Russell-2000, the picture is very similar and in this context the picture at the NYSE makes even more sense. Since last summer, the number of SPX stock trading above their 200-day moving average have been consistently deteriorating. In the broader market, the Russell-2000 hit a new all-time high last week but the Advance/Decline line of this key segment is negative and trending down since summer last year. Conclusion: The market breadth in the US remains weak and selective and rotation remains at top of the agenda. Furthermore, on a very short-term basis the very weak expansion in the number of new 52-week highs at the NYSE is definitely a warning signal and in this context we reiterate our recent call and continue to see the risk of a market pullback into later this week and into next week. Chart 9. ) S&P-500 with Stocks Trading Above its 200-DMA NOT FOR DISTRIBUTION INTO THE U.S. UBS 4
US Equity Market Update: Cyclicals Overbought and Due for a Pullback!! Strategically, it was a key call of our 2015 strategy to expect a major rotation from overbought and over-owned defensive sectors into cyclical sectors, particularly into the bombed out commodity sectors. Although it was not our preferred timing, in early February we highlighted the test and the subsequent break of the 2014 underperformance trend of cyclicals versus defensives. On the back of a further steepening yield curve and an intact reflationary trade, we saw further broad based outperformance in cyclical sectors last week. The 2014 outperformance trend has been broken relative to both the defensive camp and the SPX, which is bullish cyclicals. Having said that, on a very short-term basis more or less all cyclical sectors are overbought and due for a pullback into ideally next week. But on the back of the recent impulsive moves and without seeing any divergence in our trend work, we expect more upside in technology, SOX, consumer discretionary and materials into deeper March. In the defensive camp, utilities, staples and telecoms continued to underperform, whereas in the healthcare sector we got a new breakout, which is furthermore helping the overall market and should support the SPX within a potential short-term pullback. Utilities are increasingly oversold and with expecting a near-term market pullback, we anticipate a short-term bounce although in the bigger picture it is likely to see more weakness into early summer. Chart 10. ) US Cyclicals versus S&P-500 Chart 12. ) S&P Materials Daily Chart Chart 11. ) US Cyclicals versus Defensives Chart 13. ) S&P Consumer Discretionary NOT FOR DISTRIBUTION INTO THE U.S. UBS 5
US Equity Market Update: Chart 14. ) US Healthcare (DRG) Daily Chart Last week, the DRG broke its early December high at 555, which represents a bullish trend continuation breakout and suggests a next target at 574. Chart 15. ) Dow Jones Utilities Daily Chart The utilities sector is increasingly oversold and by expecting a potential near-term market pullback we can see a rebound in this sector into next week. However, given the underlying and intact reflationary trend it is likely to see more weakness in utilities into early summer. In this context we would use a bounce to sell for aggressive accounts. Chart 16. ) S&P Retail Daily Chart The retail sector continues to outperform and the rally-off from the January low has been purely impulsive. Shortterm, the retail sector is overbought and we can see a pullback but into deeper March it is likely to see more upside and a test of the next bigger target projection at 1143. NOT FOR DISTRIBUTION INTO THE U.S. UBS 6
Inter Market Update: US Dollar Signal Still Pending!! In our recent reports we have highlighted the make or break set up in the US Dollar, which would have far reaching consequences on the macro side. Since its late January top at 95.33, the DXY continues to trade sideways and remains de facto in a neutral position. Keep in mind, in the long-term picture the level of 95 plays a very important role, since it represents the 1985 secular bear trend in the trade weighted US Dollar Index. Consequently, a break of this level (it does not matter when) would be a big bullish trend continuation breakout signal for the US Dollar and imply more strength towards minimum 101 and 108. Given that in our cyclical model, last years started Dollar bull market should continue into 2016 it is actually just a matter of time to get this breakout. However, tactically, it is the question whether we have the chance to see a more significant pull back before moving higher or if we see an immediate break higher, which would be surprising given the still highly overbought medium-term stance in the DXY. Conclusion: Tactically and in our cyclical model, the early February low at 93.25 remains a critical support. A break of the February 3 rd low would trigger a tactical short signal in our cyclical model, and suggest US dollar weakness into April before resuming the underlying bull trend into Q2, whereas a break of the late January top at 95 would be immediately trend continuation bullish. A US dollar pullback would imply a stronger rebound in commodities and Emerging Markets. However, as long as we do not see this signal it is too early to get aggressively bullish on these themes. If we look at the relevant dollar pairs we still think that it is more likely to get a pull back. In the GBPUSD, we have a smaller double bottom in place Chart 17. ) Trade Weighted US Dollar (DXY) Daily Chart and the July bear trend has been broken. In BRLUSD we got a new reaction high but based on low momentum (suggesting that BRL trades in a wave 5) and with reaching our 2.90 target we think the next bigger move in the BRLUSD should be down. A break of 2.81 would imply a bigger US Dollar pull back!! The problem are still the commodity currencies, where the AUD and the CAD have been relatively weak the last two sessions. We still think that also here the next bigger move should be counter trend but for this we definitely need to see a bullish reversal in the AUD and CAD over the next 2 sessions if not to threaten the start of a new breakout campaign in the US Dollar. In this context we can clearly say that the DXY is moving into a classic make or break set up in the second half of the week!! Chart 18. ) Trade Weighted US Dollar (DXY) Weekly Chart Chart 19. ) GBPUSD Daily Chart NOT FOR DISTRIBUTION INTO THE U.S. UBS 7
Inter Market Update: Chart 20. ) BRLUSD Daily Chart In late January we have highlighted the corrective style of the December/January consolidation pattern in EM currencies and we said it very likely to see another but potentially final move up in pairs such as the BRLUSD. Last week the BRL has exactly reached our target projection at 2.90. The last move higher and new reaction high is a low momentum high (wave 5) and in this context we expect to next bigger move to be down. A break of 2.81 would be USD bearish and imply a set-back to 2.70 and 2.6. Chart 21. ) AUDUSD Daily Chart The problem are still the commodity currencies, where the AUD and the CAD have been relatively weak the last two sessions. We still think that also here the next bigger move should be counter trend but for this we definitely need to see a bullish reversal in the AUD and CAD over the next 2 sessions if not to threaten the start of a new breakout campaign in the US Dollar. In the AUD the critical level on the upside remains at 0.7846, where a breakout would complete a bigger bottom. In the CADUSD the critical level is at 1.2360. In this context we can clearly say that the DXY is moving into a classic make or break set up in the second half of the week!! Chart 22. ) CADUSD Daily Chart NOT FOR DISTRIBUTION INTO THE U.S. UBS 8
Inter Market Update: Gold Strong Set Back But Near to Bottom! Strategically, after the exhaustive October capitulation we called a major bottom in gold in early November and following our cyclical model we have been believing in a larger bear market rally into deeper H1 2015. Tactically, after the aggressive January rally, gold and gold mines were overbought. In late January we called a trading top and we anticipated a pullback into first half February before resuming the underlying recovery cycle by moving higher into March/April. Via the strong move higher in US interest rates (rising real rates) the current pullback in gold is stronger and lasts somewhat longer than anticipated, which is likely to have an impact on our tactical roadmap. Generally, we are sticking to our underlying bull call and particularly into March we should see another rebound. However, given that the recent set-back in gold was stronger than anticipated, it could be an indication that the whole correction process is getting more complex and further extends into April before starting the next bigger rally leg. Conclusion: The current set back in gold is stronger than anticipated but we still believe that this correction will finally post a higher low versus the November/December bottom, which would hold up the medium-term bullish price structure. In XAUEUR, the January rally was purely impulsive, which is bullish long-term. The set-back in gold mines is so far corrective (declining volume has a consolidation character) and we continue to think that the Junior Gold mining index trades in a larger basing process (forming an inverted H&S bottom), where the next rally attempt shouldn't be too far away. With our daily trend work reaching oversold territory we would use the next bullish daily reversal to buy. In the HUI index a break of 190 would be initially bullish, in gold we would buy a daily break of $1213! Chart 23. ) Gold Daily Chart Chart 25. ) Market Vectors Junior Gold Mines (GDXJ) Daily Chart Chart 24. ) XAUEUR Daily Chart Chart 26. ) Gold Bugs Index (HUI) Daily Chart NOT FOR DISTRIBUTION INTO THE U.S. UBS 9
Asian Corner Update: Nikkei-225 Bull Trend But Due For Tactical Pull Back! Tracking the breakout in the SPX, the Nikkei broke its early December high, which from a pattern standpoint was a bullish trend continuation breakout (TOPIX has resolved a classic triangle pattern to the upside). The momentum of the recent breakout was very healthy, banks have broken their 2013 underperformance trend and the underlying breadth in Japan remains outright bullish!! Small and mid-caps are strong, the number of Nikkei stocks trading above their 20-day and 200- day moving average is at extreme levels, which reflects a short-term overbought market stance but without any bigger divergence in these breadth based trading indicators it is unlikely to see any bigger correction and/or set back near-term. Conclusion: With an intact healthy momentum on the breadth side and banks outperforming the underlying trend in Japan is bullish. On a short-term basis, the Nikkei-225 is overbought and hand in hand with the US market we expect a pullback where a re-break below 18000 would be short-term negative and suggest the risk of a wash out to 17400. Via the projection of the 2013 trend support, the TOPIX is heading into an important resistance area at around 1520 to 1550, which we see as a short-term cap for the market. Generally, any near-term weakness into March and worst case into April we would still see as an opportunity to buy/add for moving higher into at least early summer. The next bigger target for the Nikkei-225 is at 19500. Chart 27. ) Nikkei-225 Daily Chart Chart 29. ) TOPIX Daily Chart Chart 28. ) Nikkei-225 vs. Nikkei Stocks Trading Above 20-Day SMA Chart 30. ) TOPIX Banks (TSE17BK) versus TOPIX NOT FOR DISTRIBUTION INTO THE U.S. UBS 10
European Equity Market Update: Europe Cyclical Breakout and Very Healthy Breadth!! It was a key call of our 2015 strategy to expect Europe starting to outperform the US market and one of our key arguments was the 11 months lagging correlation of the relative spread of the STOXX-600 to the S&P-500 versus the EURO bear market which has started last year. On track with this correction we saw a first relative breakout of the STOXX-600 in early January led by Germany and the (heavy weighted) Swiss market, which in Euro terms hit a new high. The QE announcement of the ECB was the final trigger for a broad based breakout of cyclical sectors and the recent breakout of banks was another big contributor for the break of the 2014 underperformance trend of cyclicals versus defensives. With the QE announcement we also saw a broad based breakout of the periphery, which, together with the German market, were our most preferred markets in our 2015 strategy. In late January we highlighted the relative breakouts of Italy, Portugal and the CAC-40, which completed a multiyear relative bottom versus the MSCI World. In the meantime the French market has broken its 2015 underperformance trend versus the STOXX-600, which is furthermore bullish CAC-40. Generally, in terms of market breadth we are measuring the number of STOXX-600 sectors, which have an intact weekly MACD buy signal. Last week we got a new momentum high in this indicator, which is a very bullish breadth signal. Of course, on a short-term basis Europe is overbought and we can see a pull-back but we never saw a major market top without forming a multi week/month divergence in this breadth indicator and in this context it is very likely to see more upside into at least early summer before we can see a bigger correction starting. Chart 31. ) European Cyclicals/Defensives vs. STOXX-600/S&P-500 Chart 33. ) STOXX-600 with Sector Weekly MACD Buy Signals Chart 32. ) STOXX-600/S&P-500 versus EURUSD (inverse) Chart 34. ) CAC-40 versus STOXX Europe 600 NOT FOR DISTRIBUTION INTO THE U.S. UBS 11
European Equity Market Update: Short-term Overbought and Due For a Pullback!! In early January we highlighted the high momentum breakout in absolute and relative terms (versus the US market) as the big game changer for Europe. Together with a broad based breakout of the periphery (versus MSCI World) and cyclical sectors as well as a new momentum high in our breadth indicators, this remains bullish for Europe medium-term (see page 11.). However, on a short-term basis, Europe is extremely overbought and the sentiment is too bullish/complacent. Patternwise, the FTSE-100 is trading in a rising wedge, which is toppish. From a wave perspective we see the Euro Stoxx close to completing an impulsive wave 3, suggesting the risk of a short but potentially significant setback to its last breakout level at 3320/3300 next week. Tactically, we would use strength to take profits. Sector-wise, we expect a pullback in the overbought cyclical themes before starting the next bounce higher. Chart 35.) Euro Stoxx-50 Daily Chart Euro Stoxx 50: After three weeks of sideways trading, the mid-february breakout had a trend continuing character, and the index is approaching the upper end of its next minor price target area (3550). The short-term situation is overbought and after the almost vertical rally in the most recent leaders such as banks, we expect a short-lived consolidation/pullback. Following our cyclical model, and with completing its impulsive rally from the December lows (a relatively clear wave 5 sequence has been developing from its December bottom) we expect a short-term top early this week as the basis for a pullback into next week. From a wave perspective, this setback should reach 3320 to 3300 and wipe out the last minor up leg from the early February trading bottom before starting the next move higher. Minor support is defined by last week's high at 3495 and a re-break would be initially negative. Chart 36. ) DAX-30 with SENTIX Index Market Sentiment: The SENTIX index is one of the most profound and in depth sentiment surveys globally. With last week's continued rally, we are getting an initial sentiment divergence in this index, which is usually short-term toppish and suggests the risk of a near-term pullback. Similar to the US market, with the recent rally investors are too complacent short-term; in this context we see Europe vulnerable for a near-term pull back and with cyclical sectors being pretty much overbought at both sides of the Atlantic we wouldn't be surprised to see a German market underperforming during this pullback! NOT FOR DISTRIBUTION INTO THE U.S. UBS 12
European Equity Market Update: Chart 37.) FTSE-100 Daily Chart FTSE-100: Despite the recent relative shift in favor of miners and an initial relative bounce in energy, the FTSE has not been able to stage a significant and convincing breakout above 6900. On the contrary, the most recent upside extension off from the minor low in early February is taking the shape of a rising wedge, as the result of the deteriorating upside momentum. A rising wedge is usually exhaustive and a toppish pattern and in this context we expect a short-term set back towards 6740, which we would see as the basis for a new bounce attempt into mid-march. Chart 38.) DAX-30 Daily Chart DAX-30: Into mid-january, the DAX produced another higher low and avoided a break below its minor support, which kept the pullback corrective and which was the basis for another limited upside extension. However, within Europe, the DAX is losing relative momentum, which is partly due to the recent shift in favor of banks and the relative and absolute bounces in commodity related themes. In absolute terms, the pattern in the DAX is very similar to the Euro Stoxx. The rally off from the December low has been developing in a wave 5 structure which is near to complete. On the upside we can see another extension towards 11220 but all in all we are looking for a nearterm reversal early this week as the starting point for a short but potentially sharp set back towards 10600 to 10500 before resuming the underlying bull trend. Chart 39.) Swiss Market Index Daily Chart Swiss Market Index: Only a few single stocks have been able to erase the mid- January decline, whereas most of the charts are just in bouncing mode. However, led by a rally in defensive mega caps the recovery on the index front has been further extending above our upper target area of 8740, which is a positive surprise. From a pattern perspective the rebound is taking a more and more vertical shape which is exhaustive and suggests a near-term top and subsequent pull back into later this week and into nexct week. The obvious big resistance for the SMI is defined by the January high at 9292, which is not yet within striking distance. Given the selectivity and due to a couple of laggards within the current bounce campaign, new index highs remain unlikely in the period ahead, in particular with regard to the recent shift in favor of cyclical themes in Europe, which is not pro the defensive Swiss index. NOT FOR DISTRIBUTION INTO THE U.S. UBS 13
STOXX Europe 600 Index Sector Overview: NOT FOR DISTRIBUTION INTO THE U.S. UBS 14
Weekly Technical Indicators: (Source: Pinnacle Data, Datastream) Charts: Metastock NOT FOR DISTRIBUTION INTO THE U.S. UBS 15
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