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2011-05-17-UBS-Weekly

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					                                                                   Equities Sales Trading Commentary


    Technical Analysis
    Weekly Comment                                                                                                    Global
    Michael Riesner                  Marc Müller                                                                         5/17/2011
    michael.riesner@ubs.com          marc.mueller@ubs.com
    +41-44-239 1676                  +41-44-239 1789
                                                                   h




    US Market Sitting On the Edge ... 1329 Key Support
             US Trading: Following the sequence of higher lows, the May 5 reaction low at 1329 represents a new pivotal
              support for the SPX. With the weak Friday session, SPX, DJI and DJT are sitting on key support. The cyclicals,
              mid caps and commodity sectors are trading in distributive patterns. Semiconductors are cementing a lower high,
              which is bearish and financials remain weak, with the BKX and XBD testing their 200-day moving averages. On
              the other hand, we have the still strongly outperforming defensive sectors. However, DRG, DJU and the SPX
              retail are increasingly overbought and have reached our first major target projections, which suggests a pause.
             Conclusion: Either we will see a rotation out of the overbought defensive sectors into commodity themes and/or
              financials or we will move into a significant correction, where cyclicals, technology, financials and defensives are
              correcting hand in hand. Tactically we still favor a final bounce attempt but the air is getting increasingly thin on
              the upside. From a cyclical perspective, we are moving into the time window of our top projection, so we are
              looking for a key reversal in the next five to ten sessions. A break of 1329 (daily close basis) would give us
              increasing evidence that our anticipated deeper May top is in place.
             US Strategy: With the overall momentum deteriorating and increasing selectivity, the March/April rally is part of
              a larger, distributive top-building process that should complete the 2009 cyclical bull market. From a deeper May
              top, we expect a first stronger correction leg of 10% to 15% into early Q3 to mark the start of a six- to ten-month
              cyclical bear market into ultimately H1 2012. For aggressive traders, we recommend selling into a final up-leg or
              shorting a daily break below 1329. The month of June should be very weak for risk.
             European Trading: Based on weak financials, Europe continues to underperform the US. Euro Stoxx, CAC and
              AEX violated their early May reaction lows, which is bearish and suggests that these markets have already seen
              their top, whereas the FTSE, DAX and OMX are still outperforming. However, the OMX and the German mid
              cap sector (MDAX) are trading in a rising wedge, which is bearish and suggests that the current bounce has a
              final character. Sell Sweden and German mid caps stocks into strength!!
             Inter-Market Analysis: In line with our intermediate recovery scenario, the USD is bouncing strongly. On a very
              short-term basis, the USD looks overbought and could pull back. However, into June/July we continue to expect
              more USD strength, which is bearish risk and suggests further headwind for commodities.
             The USDJPY has successfully tested its October low at 80.50. Following our cyclical models and on the back of
              our bullish turning trend work, we expect a significant rally starting in the USDJPY. We are taking a bullish
              stance on USDJPY as long as the pair trades above its last reaction low at 79.60 (stop loss for long positions). Our
              first major target is at 85.50, which represents the 2007 long-term downtrend. A rally leg in the USDJPY pair
              would be bullish for Japan relative to the MSCI world. Buy Nikkei versus MSCI world and/or exporters!!
             After the early May wash out, gold and silver are trying to stabilize/bounce. On a very short-term basis, we can
              see another bounce attempt, but given our USD scenario we expect precious metals to remain vulnerable to more
              downside into June/July before starting another bigger tactical rally into Q3. In gold, the May 5 reaction low at
              USD 1462 represents a pivotal support. A break of this level would call for a move down towards USD 1440 and
              ultimately USD 1410, which represents the 200-day moving average.




NOT FOR DISTRIBUTION INTO THE U.S.                                                                                          UBS 1
Weekly Comment


     US Equity Market Update:

    Chart 1. ) S&P-500 Daily Chart        The Air is Getting Thin
                                          Following the sequence of higher lows, the SPX has set a
                                          new pivotal support with the May 5 reaction low at 1329.
                                          Consequently, as long as the SPX trades above 1329,
                                          the price structure will remain at least on the index
                                          basis bullish and the SPX still has the chance to start
                                          another rally/bounce leg into later May. However, the
                                          overall momentum continues to deteriorate, the
                                          technical internals/market structure are weakening
                                          and, from a cyclical perspective, we are approaching
                                          the time window of our deeper May top projection. So
                                          all in all it suggests that window for a final up leg is
                                          getting smaller, since on the market structure side we
                                          also have growing evidence/conviction that the market
                                          is on the way into an important top.
                                          1) On the inter-market side, the bouncing USD is bearish
    Chart 2. ) Russell-2000 Daily Chart
                                          risk and (apart from a short-term pull back) we are
                                          continuing to see more USD strength into June/July.
                                          2) The market structure continues to deteriorate with a
                                          bigger non-confirmation in the SOX forming versus the
                                          SPX and deteriorating momentum in small and mid caps.
                                          From a pattern standpoint, we have a rising wedge
                                          forming in the Russell-2000. A rising wedge is a high
                                          probability trend reversal pattern and a break on the
                                          downside usually suggests an erratic correction. We
                                          actually still favor a final rally/bounce leg, but a daily
                                          break of 825 in the Russell-2000 would be outright
                                          bearish.
                                          3) After the mid-March spike in volatility we said that we
                                          expected volatility to decline during the course of May
                                          before moving significantly higher into the summer. In
                                          late April the VIX index marginally took out the
                                          December/February lows. With the current decline we
    Chart 3. ) VIX Index Daily Chart
                                          have a potential inverse head & shoulder pattern forming,
                                          which suggests that volatility is generally bottoming out.
                                          We cannot rule out a final move down to re-test the late
                                          April low at around 14 but in anticipation of higher
                                          volatility into June/July we would use weakness in the
                                          VIX to buy, whereas a break above 18.40 would be the
                                          ultimate signal for higher volatility.
                                          Conclusion: As long as the SPX trades above 1329 we
                                          still see the chance to start/see a final bounce leg towards
                                          1380 and ultimately 1400. However, from a cyclical
                                          perspective we continue to see the US market moving
                                          into an important price top in the next five to ten
                                          trading sessions, so that any further strength should
                                          be limited and therefore be more an opportunity to
                                          sell instead of chasing the market. Given the overall
                                          set up on the sector basis and patterns we see the risk
                                          of a 10% to 15% correction into later June/early July
                                          before starting a significant bounce into September.



NOT FOR DISTRIBUTION INTO THE U.S.                                                              UBS 2
Weekly Comment


    US Equity Market Update:

    Chart 4. ) Dow Jones Transport Daily Chart
                                                 Financials and Cyclical on Key
                                                 Support
                                                 Following last week’s weakness, we are seeing a lot of
                                                 cyclical and commodity driven sectors heading into key
                                                 support.
                                                 The set up in the transport sector is pretty much
                                                 obvious. On a very short-term basis we would still favor a
                                                 bounce attempt but a daily break below 5386 would
                                                 ultimately be bearish since it would complete a
                                                 significant price top. Into June/July, we expect a correction
                                                 down to the 200-day moving average at around 5000.
                                                 Over the last few weeks, we have highlighted the weak
                                                 structure in the semiconductor sector on several occasions
                                                 and the major non-confirmation forming versus the SPX.
                                                 The whole bounce off from the mid-March low is corrective
    Chart 5. ) SOX Index Daily Chart             and therefore just part of a larger correction. We reiterate
                                                 our mid-April call and would sell semiconductors either
                                                 relative to the market or go outright short with a break
                                                 of 430 (daily close).


                                                 Financials remain a drag on the market. Last week broker
                                                 stocks and banks hit new relative lows versus the SPX,
                                                 which is bearish. In absolute terms, both sectors are testing
                                                 their 200-day moving averages, which is strong price
                                                 support. On a short-term basis, financials are oversold and
                                                 could easily bounce, but given the bearish set up in patterns
                                                 and trends it is actually just a matter of time before a break
                                                 of 115 in the XBD and 49.20 in the BKX.




    Chart 6. ) XBD Daily Chart                   Chart 7. ) BKX Daily Chart




NOT FOR DISTRIBUTION INTO THE U.S.                                                                       UBS 3
Weekly Comment


    US Equity Market Update:

    Chart 8. ) DRG Daily Chart
                                                 Sell/Take Profit in Defensives

                                                 In early April we highlighted the breakout
                                                 constellation and the explosive set up in the healthcare
                                                 and utilities sector and recommended buying a breakout
                                                 (310 in the DRG and 416 in the DJU). Last week both
                                                 sectors hit our target projections at 336 in the DRG
                                                 and 440 in the DJU. Again, the April/May rally trends
                                                 are too steep to be sustainable and with slowing
                                                 momentum in our daily trend work we should not be
                                                 too far away from a pull back.
                                                 We have more or less the same set up in the retail
                                                 sector. Generally, the whole rally from the July 2010
                                                 bottom has, in our view, a near textbook-like
                                                 impulsive price structure and if this wave count is
    Chart 9. ) Dow Jones Utilities Daily Chart
                                                 correct the sector should be trading in wave 5, which is
                                                 the very late stages of its bull run. On the indicator side,
                                                 we have several divergences in trending studies in place,
                                                 which is confirming the scenario that a final wave 5 is
                                                 underway.
                                                 At 551, the retail sector has reached an important
                                                 Fibonacci projection target. We would use the last
                                                 significant reaction low at 536 as a trigger for profit
                                                 taking and/or selling outright short.
                                                 Although we could be just at the start of a larger top
                                                 building process, if this wave count is correct we have
                                                 a medium-term price target of 493, which would wipe
                                                 out the complete last bull move from the mid-March
                                                 low.


                                                 Conclusion: The strong rally in the defensive sectors
    Chart 10. ) S&P-500 Retail Daily Chart
                                                 during the last few weeks was a clearly stabilizing factor
                                                 for the market as a whole. Without defensives the
                                                 correction in the SPX would have already started. The
                                                 problem is that in the current situation defensives are
                                                 extremely overbought and that cyclical sectors and
                                                 commodity themes are trading in distributive top
                                                 formations, which we also finally expect to be resolved to
                                                 the downside into June. Consequently, if we don’t get a
                                                 big rotation into financials (which we think is not very
                                                 likely) we are probably facing a situation in June, where
                                                 we see cyclicals, financials and defensives correcting
                                                 hand in hand. If so, this would be quite a bearish set up
                                                 for the SPX and suggest that we have the risk of getting a
                                                 10% to 15% correction into June.




NOT FOR DISTRIBUTION INTO THE U.S.                                                                     UBS 4
Weekly Comment


    Inter-market Analysis:

    Pivotal Support in Gold at USD 1462!!
    In line with our intermediate recovery scenario, the USD is bouncing strongly. The DXY has broken the January down
    trend and trending studies are in bull mode, which is bullish. However, from a trend perspective, we as yet have no higher
    low in place, which suggests that we should not be too far away from at least a temporary pull back. Nonetheless, apart
    from any kind of potential short-term pull back, into June/July we continue to expect greater USD strength, which is
    bearish risk and suggests further headwind for commodities.
    After the early May washout, gold and silver are trying to stabilize/bounce. Silver is underperforming gold, which has
    consequences on the patterns in both metals short-term. Whereas gold is likely to undergo a classic corrective a-b-c bounce
    pattern, we may only see a weak and more complex bounce pattern in silver. However, tactically the key message from our
    side is unchanged. Given our USD scenario, we expect precious metals to remain vulnerable for more downside into
    June/July before starting another bigger tactical rally into Q3. In gold, the May 5 reaction low at USD 1462 represents a
    pivotal support. A break of this level would call for a move down towards USD 1440 and ultimately USD 1410, which
    represents the 200-day moving average.
    Silver has successfully tested its 200-day moving average at around 32. This level also represents the 50% retracement of
    the February 2010/April bull run and it is a level we would expect to retest in June/July. Worst case is another extension to
    USD 28 (62% retracement) but our key call remains unchanged. From a June/July trading bottom we expect another
    significant rally starting into Q3 and from a price point of view we expect at least a re-test of the April high at USD 50.


    Chart 11. ) DXY Daily Chart                                    Chart 13. ) Silver Daily Chart




    Chart 12. ) Gold Daily Chart                                   Chart 14. ) HUI Index Daily Chart




NOT FOR DISTRIBUTION INTO THE U.S.                                                                                         UBS 5
Weekly Comment


    Inter-Market Analysis:

    Major USDJPY Low Underway … Buy Japan!!
    After the sharp setback of the last four weeks, the USDJPY has successfully tested its October low at 80.50. Following our
    cyclical models and on the back of our bullish turning trend work, we expect a significant rally in the USDJPY and today’s
    reversal candle could be in fact the start of this rally leg. Generally, the April setback was part of a long-term bottom
    process in which we see the mid-March spike as an external shock on the back of the tragic events in Japan. Consequently,
    a bigger rally leg in the USDJPY pair would bring up a classic double bottom speculation in which we expect at least a test
    of the early April high at 85.50, which in the meantime also represents the 2007 long-term downtrend.
    Conclusion: With today’s reversal candle we are taking a bullish stance on the USDJPY and this call remains intact as
    long as the pair trades above the last reaction low at 79.60 (stop loss for long positions). Following our overall bullish
    tactical call on the USD, we expect a first major rally leg into June/July in which we see a re-test of the April high at
    85.50, which also represents the 2007 long-term downtrend.
    From a cross asset class perspective, a rally in the USDJPY pair would be bullish for Japan relative to the MSCI
    World. Buy Nikkei versus MSCI world and/or export oriented sectors, which of course is a pure currency play!
    In absolute terms the Nikkei is more or less trading sideways since the first stronger bounce from the mid March low. On
    the downside the market has strong support at 9404 and 9317. A daily close above 9690 would be initially bullish and
    worth following by setting a stop loss below the last reaction low. Initial target is at 10017 to 10190.

    Chart 15. ) USDJPY Daily Chart                                Chart 17. ) Nikkei/MSCI World versus USDJPY




    Chart 16. ) USDJPY Daily Chart                                Chart 18. ) Nikkei-225 Daily Chart




NOT FOR DISTRIBUTION INTO THE U.S.                                                                                        UBS 6
Weekly Comment


     European Equity Market Update:

    Wedge Forming in German MDAX, SMI and OMX!!
    The defensive trade continued to dominate the scene last week and healthcare was again the top performer on a weekly
    basis, followed by food and oversold groups like media and travel. However, based on weak financials most of Europe
    continues to underperform the US. The Euro Stoxx, CAC and AEX violated their early May reaction lows, which is
    bearish and suggests that these markets have already seen their top. On the other hand we have the SMI, DAX and OMX
    still outperforming. Keep an eye on the Swedish OMX and the German mid cap sector (MDAX). Both are trading in a
    rising wedge (similar to the pattern in the SMI), which is bearish and suggests that the current rally has a very final
    character. Sell Sweden and German mid caps stocks into strength!!
    Euro-Stoxx-50:
    Last week’s initial bounce attempt ran into sand and further weakness in materials, chemicals, industrials and energy
    pushed the Euro-Stoxx-50 into red territory on a weekly close basis. With moving into support offered by the 200-day
    moving average at 2856 and while holding structural key support defined by the last significant low at 2833, it is too early
    to write off a final bounce/up-leg but given the structural weakness in key sectors we see the upside limited. A break of
                                                                  2833 would be bearish and call for an extension on the
    Chart 19. ) Euro Stoxx-50 Daily Chart
                                                                  downside towards the mid March low at 2717.


                                                                  MDAX/OMX:
                                                                  Keep an eye on the German mid cap index (MDAX) and
                                                                  the Swedish OMX. Both markets have been strongly
                                                                  outperforming over the last few weeks but from a
                                                                  pattern standpoint they are trading in a rising wedge,
                                                                  which is a reversal formation with a clearly bearish
                                                                  character. It’s important to understand that a wedge
                                                                  formation usually gets resolved by an erratic move on
                                                                  the downside, which in both cases implies the risk of a
                                                                  significant correction into June/July.
                                                                  The relevant key support levels we would use as a trigger
                                                                  for larger profit taking and/or a shorting these markets.
                                                                  For the OMX key support is at 1158, for the German
                                                                  MDAX key support is at

    Chart 20. ) German Mid Cap Index (MDAX) Daily Chart            Chart 21. ) OMX Daily Chart




NOT FOR DISTRIBUTION INTO THE U.S.                                                                                        UBS 7
Weekly Comment


    European Equity Market Update:
    Chart 22. ) FTSE-100 Daily Chart
                                                 FTSE-100 Daily Chart:
                                                 The FTSE remains stuck in its obvious trading range with
                                                 key support at 5860 and breakout resistance at 6100. The
                                                 two main forces remain the defensive camp (healthcare,
                                                 food and retail) and cyclical themes plus banks, where the
                                                 latter are offsetting the gains in the defensive trade. The
                                                 set up is very similar as in the US. At this point where we
                                                 see defensives starting to pull back and we don’t see a
                                                 healthy rotation back into cyclicals and/or financials, at
                                                 this point the FTSE will have a problem to hold its key
                                                 support at 5860. Next bigger support would be the 200-
                                                 day moving average at 5770 and the mid March low at
                                                 5600, which is a level that we expect to be seen in June.




    Chart 23. ) DAX-30 Daily Chart               DAX-30:
                                                 Relative to the Euro-Stoxx-50, the DAX is still in
                                                 outperforming stance and as long as we don’t see a
                                                 significant break of 7291 the current consolidation pattern
                                                 has still a constructive character, meaning that the door
                                                 for a final up-leg is still open.
                                                 Short-term key support on a daily close basis is
                                                 unchanged at 7291 and if the DAX is able to generate a
                                                 sustainable reversal early this week, the tactical focus
                                                 would shift to its key resistance at 7600.
                                                 However, following the picture in the US, the air for
                                                 another rally leg is getting increasingly thin, so that we
                                                 would use strength to sell instead of chasing the market
                                                 on the upside. A break of 7291/7245 would be bearish
                                                 short-term and suggest a set back towards 7000 and
                                                 ultimately 6800 into June.
    Chart 24. ) Swiss Market Index Daily Chart


                                                 Swiss Market Index:
                                                 The SMI has been a benefiter of the outperformance in
                                                 healthcare, food and personal. However, the Swiss market
                                                 is also a good proxy for the short-term overbought
                                                 situation of the defensive camp. With trading just below
                                                 the broken July 2010 uptrend line at 6640, further trading
                                                 upside looks capped. Furthermore, the whole April/May
                                                 rally leg has the shape of a rising wedge, which is bearish
                                                 and suggests that we shouldn’t be too far away from a
                                                 bigger reversal and subsequent losses.
                                                 On the index front, we see the upside capped at around
                                                 6640 and the focus remains on the defensive names,
                                                 where a breather would weigh on the SMI. Support area is
                                                 between the 200-day moving average at 6450 and the
                                                 early May low at 6396.




NOT FOR DISTRIBUTION INTO THE U.S.                                                                    UBS 8
Weekly Comment


     STOXX Europe 600 Index Sector Overview:




    The STOXX, Euro STOXX and FTSE350 sectors can be traded via CFD and UBS will make guaranteed bid-offer spreads
    in them. Normal sizes are EUR 5 million to EUR 20 million with others available on request. All orders can be executed
    on an agency basis (execution commission is applied to all trades) and short rates, borrow rates and dividend rates are pre-
    determined as per standard CFD agreement.


    * The above stock selection is a recommendation based on trend works, relative strength and pattern analysis. Most parts of the selection are based on a
    quantitative technical selection model. The character of the model is mainly trend-following. The aim is to provide a consistent top-down approach and to
    give the medium-term-oriented investor a selection of technically favorable looking stocks.




NOT FOR DISTRIBUTION INTO THE U.S.                                                                                                                    UBS 9
Weekly Comment


    Weekly Technical Indicators: (Source: Pinnacle Data, Datastream) Charts: Metastock




    This communication is issued by UBS AG or an affiliate (“UBS”) by the Sales or Trading Department to institutional investors only and is
    not research. It is for informational purposes and is not an official confirmation of terms. It is not guaranteed as to accuracy, nor is it a
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    To the extent permitted by law, UBS does not accept any liability arising from the use of this communication. For additional information,
    please contact your local sales or trading contact.

    © 2011 UBS. All rights reserved. Intended for recipient only and not for further distribution without the consent of UBS.




NOT FOR DISTRIBUTION INTO THE U.S.                                                                                                         UBS 10

				
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