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UBS
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Equities Sales Trading Commentary
Technical Analysis
Weekly Comment
Global
 
Michael Riesner Marc Müller 17/08/2010
michael.riesner@ubs.com marc.mueller@ubs.com+41-44-239 1676 +41-44-239 1789
 
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US Market Triggered Hindenburg Omen
 
US Trading
: As highlighted in last week’s technical alert, the break of 1107 in the SPX cements the August 9high at 1129 as an important tactical top, and as long as the market is not able to re-break this pivotal resistancewe see equities as short-biased into early October. With trending studies is short mode, the Russell-2000underperforming and bearish patterns emerging in cyclical sectors, we expect more short-term weakness/down-testing before possibly seeing a bounce into early September/Labor Day. After the break of 1088, we have thenext support at 1056 to 1050. We continue to see rallies as an opportunity to sell.
 
On a sector basis we would avoid cyclical sectors, whereas in the defensive camp healthcare is improving andutilities have hit a new high against the SPX. Keep an eye on semiconductors. Short-term, the sector is oversold, but after breaking its 2008 bull trend we also see the 2009 outperformance trend at risk.
 
US Strategy:
Last week a Hindenburg Omen (HO) occurred in the US market. The HO is one of the major  patterns in technical analysis that consists of several technical indicators. If we get a second signal in the next 36trading sessions, we would have a “confirmed” HO in place, which in the past was a superb leading indicator for strong corrections, major market crashes or bear markets. From its technical character, a HO is the confirmationthat a classic distribution phase is underway, which fits the potentially toppish patterns in major US headlineindices and our general cautious view on equities. We continue to see the risk of a 10% to 15% correction intoearly October.
 
European Trading
: Last week’s reversal cements the early August breakouts as a classic false break, whichidentifies these tops as a major tactical top. Although the market is oversold and could bounce, on a short-term basis we see the risk of an overshooting, so our focus is on the next bigger supports. On the sector front we saw asignificant shift in leadership last week. Whereas telecoms continue to outperform, we witnessed a strong bouncein absolute and relative terms in food and healthcare. On the other hand, financials and, in particular, cyclicalgroups weighed on the broader market. Patterns in cyclical sectors are mostly negative, so we would take acautious tactical stance on construction, industry, basic resources, travel and autos.
 
Inter-Market Analysis:
The USD/JPY continues to play an important role in the current market environment.After last week’s successful test of the December key support at 85 we saw yesterday another sharp reversal inthe USD/JPY pair. If we talk about a potential catalyst on the macro side, the USD/JPY has in our view the potential to be the trigger of a big move in financials markets, so continue to keep an eye on this key indicator!!Semiconductors, as a classiccyclical leading indicator for the US market, have brokentheir 2008 bull trend.Although on a short-term basis the sector is oversoldand could bounce, the long-term trend break isconfirmation of our overall bear case as well as theHindenburg Omen that wastriggered last week.Sell the rallies.
 
 
Weekly Comment
 . UBS
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US Equity Market Update:
SPX Below 1088 …
From a cyclical standpoint, the break of 1107 in theSPX cements the August 2009 high at 1129 as animportant tactical top, which is very important for therisk levels of our short call as well as our underlyingtactical strategy. As long as the SPX is not able to re-break 1129, the US market is short biased into earlyOctober, whereas a break of 1129 would change thewhole underlying technical and cyclical picture towarda more bullish medium-term picture. Again, as long asthe SPX does not break 1129 we have no reason tochange our medium-term bear case.
Our weekly momentum indicator topped out last week,reaffirming that the July counter trend rally has reachedits peak. From a pattern standpoint we have alwaysfavored a classic a-b-c correction pattern forming from anApril top into our projected 4-year cycle low into earlyOctober. If we are correct with this scenario, then wave B peaked out last week, which automatically means that thenext bigger tactical down-leg into early Q4 is underway.
If we see a textbook a-b-c corrective pattern, wave Cshould equal wave A in time and length. This wouldsuggest a final target of around 944, which is the 50%retracement of the 2009/2010 bull cycle; from a timingstandpoint the low should occur in the second week of October.Conclusion:
With fresh short signals materializing indaily and weekly price indicators, the broader market(Russell-2000) underperforming and bearish patternsemerging in a lot of cyclical sectors, we expect moreweakness/down-testing short-term before we could see a bounce into early September and into Labor Day, whenwe very often see positive markets.
The question is whatwill happen over the next two weeks in terms of momentum, since in the three weeks before Labor Daywe usually see the seasonal low in market activity andtherefore very low volumes.
In our technical alert we said that a break of 1088 wouldsuggest more short-term pressure and harbors the potential of a negative surprise. This picture is unchanged,not least because the Russell-2000 is teetering on the edgeof re-breaking its broken April downtrend. If thishappens, the next big event in the market would be a testof the markets' key support at 590, which is the necklineof a major head & shoulder formation. Translated itmeans that after the break of 1088 in the SPX the nextsupport is at 1056 to 1050. We would continue to seerallies as an opportunity to sell.
Chart 1. ) S&P-500 Daily ChartChart 2. ) S&P-500 Weekly ChartChart 3. ) Russell-2000 Daily Chart
 
 
Weekly Comment
 . UBS
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US Equity Market Update:
SOX Index:
In June/July we repeatedly highlighted the significanceof the 330 key support in the SOX index. With lastweek's sell-off, the key sector has broken this support,which also means that
semiconductors as a classiccyclical leading indicator for the US market havebroken their 2008 bull trend
. Although on a short-term basis the SOX is oversold and could of course bounce, the long-term trend break is confirmation of our overall bear case as well as the Hindenburg Omenthat was triggered last week.
Sell the rallies.
Morgan Stanley Cyclical Index:
With a fresh sell signal in daily trending studies (MACD),the market has triggered a new tactical short signal. Froma pattern standpoint the July rally can be seen as the rightshoulder of an almost textbook head & shoulder formation. The neckline of this potential top formation is753; we expect this level to be tested soon.From a sector standpoint, therefore, the message is clear:If we look at the overall patterns, we would avoid cyclicalsectors, whereas in the defensive camp healthcare isimproving relative to market and utilities have hit a newhigh against the SPX.
Housing:
After breaking 96 the HGX has triggered a new tacticalshort signal. The July bounce pattern has the shape of aclassic corrective a-b-c counter rally, which is a patternwe already favored in our last update on housing.
In ourJuly 27 report we recommended selling a potential keyreversal between 100 and 105. Following last week’sbreak and a fresh daily MACD sell signal, and as longas we do not see a change in the underlying relativeweakness of the sector, we will see new absolute lowsin later Q3 and into early Q4.
A break of the July low at87 would suggest a move to next bigger support at 77 andthe July 2009 reaction low at 72.
Chart 4. ) SOX Index Daily ChartChart 5. ) Morgan Stanley Cyclical Index (CYC) daily ChartChart 6. ) Housing Index (HGX) Daily Chart
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