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

Equities Sales Trading Commentary

Technical Analysis
Weekly Comment
Michael Riesner

Marc Müller

michael.riesner@ubs.com
+41-44-239 1676

marc.mueller@ubs.com
+41-44-239 1789

Global
25/11/2014
h

SPX Overshooting Status… Europe/DAX Catching Up!


US Trading: After the aggressive rally from the mid-October trading bottom into early November, we expected a short
corrective pullback into deeper/later November before moving higher into later December. After just a few days of sideways
consolidation, the SPX hit a new high driven by continued mega cap outperformance plus internal sector rotation (strong retail
and commodity themes starting our anticipated next rebound leg). So although our bias into December was bullish, on the way
higher we have been clearly too cautious short-term. One consequence of the continued and exhaustive overshooting is that we
expect our anticipated later December top to shift into early December, which we would see as the beginning of a distributive
top building process that could last into January before starting a significant correction cycle into later Q1.



A break of 2070 would call for more overshooting towards 2095 and best case 2120/2140, whereas a break below 2040 would
imply that a more important tactical top is forming. Mega caps are in an exhaustive overshooting process, our daily trend work
is at overbought extremes, and the SKEW index is spiking versus the low VIX index. Although it is too early to get bearish
due to seasonally, we nonetheless think that most of the year-end rally we have already seen, which limits further upside.



US Strategy: After seeing the anticipated 10% correction leg we called an important tactical bottom in mid-October; our call
was for a significant rebound into later December before starting a new and potentially sharp correction leg into later Q1. A
new high in the SPX was not our favored scenario but we always said that even if we were to see another surprise (via the
relevant sector rotation) this wouldn't negate our bear call for Q1. On the macro side we continue to have a number of major
divergences in place (VIX, high yields, weak breadth) and together with the exhaustive overshooting we see the SPX trading
in a wave 5 of a larger degree, which should complete the 2011 bull cycle. We are sticking to our cyclical roadmap and
continue to see the risk of a significant correction/washout in H1 2015 before resuming the underlying bull market.



European Trading: After a 2-week consolidation phase Europe has started its next rally leg higher into December somewhat
earlier, while the pullback into deeper November was also milder than initially feared. From a relative standpoint, Europe
(particularly the FTSE-100, DAX and OMX) is catching up versus the US market and the SMI continues to stand out via its
mega cap outperformance. One consequence of this is that in most of core Europe our anticipated rebound from the midOctober bottom into later December will end up higher as initially favored, whereas in the periphery the patterns remain
corrective. The Euro Stoxx-50 can overshooting towards its summer high at around 3300 into later this week/early December,
but on the back of the overshooting sentiment we expect Europe to head into an important tactical top in early December,
which means we would not chase Europe on current overbought levels, and if so then only selectively.



Inter Market Analysis: The US dollar remains strong but as long as we don’t get a new high momentum breakout in the
DXY (and as long as the AUD does not break its early November low at 0.8540) our favored scenario remains to see more US
dollar pulling back/consolidation into later December before resuming the underlying US dollar bull trend into Q1.



Although commodities are still relatively weak, tracking the US dollar consolidation we see crude oil, copper, platinum and
soft commodities at least stabilizing. In line with our last call, Russia is bouncing and together with the BBG Commodity
index basing and the CCI Index having broken its June bear trend we expect more corrective bouncing in commodities and
related sector themes into later December.



After the exhaustive capitulation and after reaching our $1140 correction target we called an important tactical bottom in early
November in gold and gold mines. With the aggressive rebound, the gold bugs index has broken its August bear trend and
gold is on track with our initial target at $1250 to $1280 into deeper December, where we expect the yellow metal heading
into a minor trading top followed by a tactical pullback into early January before moving higher into deeper H2 2015. We
remain bullish gold and gold mines.



Asian Corner: On the back of the Chinese rate cut decision, China continues to outperform and the SSEC has completed a
major long-term price bottom, which is long-term bullish. In the rest of Asia and Emerging Markets the rebound from the midOctober low is corrective and in line with our recent calls we continue to see most of Asia and EM's posting a lower high
versus its summer top into December, which is bearish medium-term and suggests more EM underperformance into H1 2015.

NOT FOR DISTRIBUTION INTO THE U.S.

UBS 1

Weekly Comment

US Equity Market Update:
Chart 1. ) S&P-500 Daily Chart

Chart 2. ) S&P-500 with McClellan Oscillator

SPX in Overshooting Status!!
After the 10% correction into our projected mid-October
trading bottom we expected a market rally/rebound into
late December before starting a major correction cycle
into deeper H1 2015. Having said that, our favored
pattern of a November/December rebound was actually to
see a volatile corrective pattern developing instead of a
sharp V-shape bottom followed by an impulsive squeeze.
One reason for the vertical move and the SPX hitting new
highs (whereas the MSCI World, most of Europe and
Asia (ex Japan) is still trading below its summer top) was
the continued outperformance of defensive mega caps
together with the oversold bounce in cyclical sectors. In
early November we adjusted our pullback scenario and
we said that with a potential rotation into the lagging
commodity sectors (on the back of our US dollar pullback
call) it was likely that a pullback in the SPX into
deeper/later November would only be shallow before
moving higher into December.
On the sector front we see fading momentum in the recent
outperformer sectors (technology, staples, DJT and DJU);
whereas we got new breakouts and relative
outperformance in retail stocks, selective strength in
biotech and commodity themes are starting our
anticipated next rebound leg. This rotation was the main
reason why we actually did not see one real down day in
the SPX, so that after a couple of days of a sideways
consolidation the market broke out to a new all-time high.

Chart 3. ) S&P-500 Daily Chart

The overall technical picture has not changed. The market
breadth remains weak with the Russell-2000 losing
momentum and a divergence in the number of new 52week highs versus the new SPX high. We have an intact
divergence in the VIX index versus the SPX. High yields
remain weak, our indicator work has reached extreme
territory and the vertical move from mid-October bottom
is clearly exhaustive. Consequently, although it is
currently too early to get bearish on the back of the
still bullish seasonality, our view about the risk of a
significant correction in Q1 has not changed and the
continued rally without any real pullback suggests
that we could even top out earlier than our previously
expected late December timing.
Conclusion: On the back of the continued overshooting
we expect our anticipated late December top to shift into
early December, which we would see as the beginning of
a distributive top building process (no top without a top
formation!!) that could still last into January before
starting our expected H1 major correction cycle. A break
of 2070 would call for more overshooting towards 2095
and best case 2120/2140, whereas a break below 2040
would imply that a more important tactical top is forming.

NOT FOR DISTRIBUTION INTO THE U.S.

UBS 2

Weekly Comment

US Equity Market Update:
Chart 4. ) S&P-500 versus VIX Index

Rising SKEW Index!!
In early July we said that after hitting an 8 year low in the
VIX index around 10 this could represent the low of the
year in the volatility. Into H2 we generally expected to
see higher volatility and intellectually, by anticipating a
bigger market top or any bigger correction in H2 2014
and/or Q1 2015 would implicitly suggest rising volatility
before topping out.

Chart 5. ) S&P-500 with CBOE SKEW Index

Again, prior to important tactical tops and/or a major
top we usually see a bigger divergence forming in the
VIX versus the SPX. The VIX index bottomed in early
July and tactically, we never had a longer lasting
divergence between the VIX and the SPX since the
2007 top, which was led by an 8-month lasting period
of rising volatility before the market finally topped
out. With December we are heading into the 6th month
of gradually rising volatility!!
In this context, it is also interesting to look at the
SKEW index. The CBOE SKEW measures the tail
risk in the market via the pricing of out-of-money
options. A strongly rising SKEW index indicates that
investors are obviously buying "crash protection".
This gets interesting when we see a relatively low VIX
index (the VIX Index measures the premium of the
money/close to the money options) but the SKEW
index rising. Relative to the October sell-off, the VIX is
relatively low implying a lot of complacency in the
market, which fits the 9-year low in the AAII Bearish
Consensus and the strongly declining CBOE Put/Call
Ratio (which is forming a major divergence). However, at
the same time we have institutional investors buying crash
protection.

Chart 6. ) S&P-500 with 10-Day CBOE Put/Call Ratio

NOT FOR DISTRIBUTION INTO THE U.S.

Conclusion: A rising SKEW index is definitely not a
pure timing tool but similar to divergences in other
key indicators it tells us that minimum a bigger
tactical top shouldn't be too far away.

UBS 3

Weekly Comment

US Equity Market Update:
Chart 7. ) S&P-500 Daily Chart with NYSE New 52-Week Highs

Breadth Still Selective/Weak!
The new high in the SPX was largely driven by the
continued rally and outperformance in defensive mega
cap sectors such as staples and healthcare as well as heavy
weighted technology stocks. This is one reason why the
breadth in the US market remains relatively weak.

Chart 8. ) S&P-500 with AAII Bullish Consensus

It was a key call of our 2014 strategy to expect small and
mid-caps to underperform and therefore mega caps to
outperform. In this context we said that this year we
expect to see the classic fireworks that we usually see in
the late stages of a bull market. The vertical moves in
staples, healthcare or transport we see as part of this
overshooting process, and it is also the main reason why
the SPX is again surprising on the upside. So although
tactically we have recently been too cautious, in the
bigger picture we still see the current market development
pretty much on track with our base case scenario
forecasting a significant correction in H1 2015.
The only question remains the potential timing of a major
top. In our 2014 strategy we said that we favor a late
summer top but that we couldn’t rule out an extended
distributive top building phase into year-end, where the
SPX could hit a new high via the described final
overshooting in large and mega caps, and if so, this would
not change our underlying scenario of expecting a
significant correction in H1 2015. Tactical we always said
that we expect the rally off from the mid-October bottom
to move into a late December top. After the vertical and
exhaustive rally of the last few weeks we question the
market will continuing to rally into late December.

Chart 9. ) S&P-500 with NAAIM Equity Position

Generally, with the aggressive rally of the last few weeks
our sentiment work has moved back into contrarian
territory and is forming a major divergence versus the
new SPX high, which is something we usually see prior to
important tops. The bullish seasonal factor combined with
central banking activity has caused the remaining bears to
capitulate. Seasonally, we usually see a pullback in the
first half December followed by the classic
Christmas/year-end rally, and this is actually a very solid
and high probability season pattern. We think this is a
very consensual theme.
Conclusion: The SPX has been moving vertical and
reinforced by central banking activity the squeeze
continued last week. It suggests in our view that the
majority of the investors are positioned, which means
that the classic year-end rally we have more or less
already behind us. If so, we automatically have the
risk of moving into an earlier top either later this week
or next week when the ECB finally makes their
announcement.

NOT FOR DISTRIBUTION INTO THE U.S.

UBS 4

Weekly Comment

US Equity Market Update:
Chart 10. ) US Oil Index (XOI) Daily Chart

Commodity Themes Bouncing!
In our last weekly comment we said it is likely to see a
second rebound wave in commodity sectors into later
December, which tactically would be bullish SPX.
On the macro side commodity prices are at least
stabilizing and although the price action in the economy
sensitive commodities remains relatively weak and
actually disappointing we see oil stocks starting our
anticipated second rebound leg. A break of 1489 in the
XOI would call for an extension towards 1531 to 1570. In
the oil service sector a break of 247 would call for 260 to
270.

Chart 11. ) Oil Service Index (OSX) Daily Chart

Generally, we are sticking to our underlying cautious
trend picture, since the whole rebound pattern from the
October bottom is just corrective and it will very likely
lead to a lower high in the energy sector into December,
which is strategically bearish and implies another
correction wave into deeper/later Q1.

Chart 12. ) NYSE ARCA Steel Sector Daily Chart

Steel stocks have broken their steep August bear trend,
which completes an impulsive wave 5 correction cycle
and suggests more near term strength towards 1180 to
1186 in the NYSE ARCE Steel index. However, similar
to oil stocks, any bigger rebound into December will
bring us a significant lower high versus the summer top
and in this context the underlying price structure in this
sector remains bearish.

NOT FOR DISTRIBUTION INTO THE U.S.

UBS 5

Weekly Comment

US Equity Market Update:
Chart 13. ) S&P Consumer Discretionary Daily Chart

Breakout in Retail!!
The weak oil price is perceived as a threat on the macros
side since it underpins the latent deflationary trend on the
price front. However, the weak oil price is obviously also
a big pushing factor for the global consumer sector where
we see a broad based breakout in the US and European
consumer stocks.
In mid-November we saw a concerted breakout of
consumer discretionary and the SPX retail. Important to
highlight is that both sectors have been underperformer
versus the SPX with more or less trading volatile
sideways for the last 12 months. All the more bullish is
the breakout of the SPX retail out of a 12 months
sideways trading pattern. Furthermore, form a relative
standpoint the retail sector has completed a major inverted
head & shoulder bottom, which suggests that we have just
started a longer lasting outperformance trend in the US
retail sector.

Chart 14. ) S&P Retail Daily Chart

Conclusion: Short-term, consumer discretionary and the
SPX retail are increasingly overbought and both sectors
are reaching their next bigger targets/resistance levels.
The question is also if it makes sense to call a major
breakout in a sector if on the other hand we expect the
overall market to move into an important top in the next
few weeks. However, with completing a major relative
bottom our call is that into 2015 we can expect to see
more outperformance in US retail and this suggests that
any pull back and/or correction moves in real terms would
be a buying opportunity.

Chart 15. ) SPX Retail versus S&P-500
x10 -2

XRT (Re tail) vs . S&P-500

5.00

4.90

4.80

4.70

bottom breakout !!

4.60

4.50

4.40

4.30

S

S
H

4.20
N

D

J

F

M

A

M

J

J

A

S

O

N

D

J

F

M

A

M

J

J

A

S

O N

Source: Thomson Reuters Datastream

NOT FOR DISTRIBUTION INTO THE U.S.

UBS 6

Weekly Comment

Inter Market Update:

More US Dollar Consolidation Into later December!
Strategically, it was a key call of our 2014 strategy to expect the US Dollar moving into a major 4-year cycle bottom in
deeper/later summer, which from a cyclical standpoint we saw and still see as the basis for a 2 years bull market into 2016.
The break of the 1.35 key support in the EURUSD in July was the game changer for the EUR (completing a major double
top and break of 2012 bull trend). In August we saw a series of major breakdowns in other key US Dollar pairs (SEK,
GBP, SGD, CAD, EM currencies) and in September we got the break down in the AUDUSD. Together with the break of
the highlighted key resistance in the DXY at 84.50 to 85 (2005 bear trend and the 2013 summer top), from a cyclical
aspect, this gave us the ultimate and formal confirmation that a new major US Dollar bull market is underway, which we
expect to last into 2016.
Tactically, after the impulsive July/September rally the DXY extended its bull cycle into early November, which together
with a major divergence forming in our daily trend work we see as a wave 5, suggesting the US dollar should be near to an
important tactical pull back, which however should not touch the underlying US dollar bull trend. After several days of
sideways consolidation the DXY has hit a marginal new high, which questions the thesis of a short-term dollar pull back.
However, the new high in the DXY is so far low in momentum, we have an intact divergence in our indicator work,
and if we look into the relevant dollar pairs the EUR, AUD, NZD are still holding their early/mid-November low.
As long as this is the case we expect in pairs such as the AUDUSD and NZDUSD at least to see a second corrective
rebound move (wave c) into December before starting
Chart 16. ) DXY Daily Chart
the next bigger down leg. As long as the EURUSD does
not break its early November low at 1.2350 we have at
least short-term still the scenario of a potential double
bottom forming. Generally, a break of 1.26 would be
short-term aggressively bullish EUR and imply a short
squeeze towards 1.27/1.28. In the DXY a break of 87.40
would be short-term bearish US Dollar an dimply a short
and potentially sharp pull back towards 86.70 and 86
into later December.

Chart 17. ) EURUSD Daily Chart

Conclusion: The US Dollar remains strong and a real sell
signal for indicating our suggested dollar pull back scenario
into later December is still pending. However, as long as we
don’t get a new high momentum breakout in the DXY, as
long as the AUD does not break its early November low at
0.8540 and as long as the EUR is able to hold its early
November low, our favored scenario remains to see more US
dollar pulling back/consolidation into later December before
resuming the underlying US dollar bull trend into Q1.
On the macro side it is obviously essential for our rebound
call on commodities and related sector themes to see a
somewhat weaker US Dollar and in this context we would
keep a close eye on the AUDUSD pair. If a second rebound
wave in the AUDUSD should fail, it would be an indication
that also the rebound in commodities would finally fail,
which sooner or later should also bring gold under pressure.

NOT FOR DISTRIBUTION INTO THE U.S.

UBS 7

Weekly Comment

Inter Market Update:
Chart 18. ) AUDUSD Daily Chart

The rebound in the AUDUSD is weak and corrective but
as long as the pair holds its early November low at 0.8540
we expect at least a second rebound wave c that could
already complete a bigger corrective counter trend
pattern, which we would see as the basis for renewed US
Dollar strength into Q1.

Chart 19. ) NZDUSD Daily Chart

A similar set up/patter we have in the NZD. The rebound
from the early November low is so far just corrective and
in this context we would expect just a second rebound
wave into December before starting a new down leg into
Q1.

Chart 20. ) JPYUSD Daily Chart

One reason for DXY hitting a marginal new reaction high
is the continued weakness of the JPY. However, with our
daily trend work beginning to divergence, we see the
USDJPY trading in a wave 5, which should be near to
complete the impulsive October rally. A pull back in the
JPYUSD should be the final trigger that also in the DXY
we should see a somewhat stronger pull back.

NOT FOR DISTRIBUTION INTO THE U.S.

UBS 8

Weekly Comment

Inter Market Update:

Commodities Bouncing But Momentum Remains Weak!
On the back of our US Dollar pull back scenario we have been expecting a rebound in commodities into later December.
Although commodities are still relatively weak we see crude oil, copper, platinum and soft commodities at least
stabilizing. In line with our last call, Russia is bouncing and the move is significant. The RTS is on the way of challenging
its July down trend and with the help of a more significant rebound in commodities this trend should be broken, which
would call for 1112 as a next target. On the index side the BBG Commodity index is basing and the CCI Index has broken
its June bear trend, which suggests more commodity strength near-term.
Conclusion: Although the rebound in commodities is so far just very weak we continue to believe into at least one more
rebound wave into later December before into Q1 we could see renewed weakness. On the macro side the US Dollar
remains a key variable for any momentum on the commodity side. Within the commodity complex we would keep a close
eye on copper. Theoretically, copper is trading in a basing process but given that copper could not really profit from the
rate cut in China is suspicious. Generally, a break of the early November low at 2.95 would be bearish copper and
basically negate our whole commodity rebound scenario, so we would keep a close eye on copper as a key indicator in the
commodity complex!!

Chart 21. ) CCI Index Daily Chart

Chart 23. ) Copper Daily Chart

Chart 22. ) BBG Commodity Index Daily Chart

Chart 24. ) RTS Daily Chart

NOT FOR DISTRIBUTION INTO THE U.S.

UBS 9

Weekly Comment

Inter Market Update:
Gold Bullish Into December!
Tactically, we have been bearish gold from early August on and from a cyclical aspect we said we expect gold to move
into a late Q4 bottom as the basis for a more significant and longer lasting rebound/bear market rally into deeper H1 2015.
The break of the obvious key support at $1180 caused an exhaustive capitulation and after reaching our first correction
target at $1140 we called an important tactical bottom in early November in gold and gold mines.
With the aggressive rebound of the last 2 weeks the gold bugs index has broken its August bear trend. In gold we have a
fresh weekly momentum buy signal in place, which completes a major momentum divergence. Generally, together with
the buying set up on the daily basis this suggests that the early November bottom represents a more important bottom,
which we saw and continue to see minimum as the basis for a several months lasting rebound/bear market rally into deeper
H1 2015.
Conclusion: Gold is on track with our initial target at $1250 to $1280 into deeper December, where we expect the yellow
metal heading into a minor trading top followed by a tactical pullback into early January before moving higher into deeper
H2 2015. From a pattern standpoint we expect gold and the gold bugs index posting a higher low into early January and in
this context we remain bullish gold and gold mines and would see a pull back into early January as another significant
buying opportunity. Our larger price target in deeper 2015 is unchanged at $1350 to $1400
Chart 25. ) Gold Daily Chart

Chart 27. ) Gold Weekly Chart

Chart 26. ) XAUEUR Daily Chart

Chart 28. ) Gold Bugs Index (HUI) Daily Chart

NOT FOR DISTRIBUTION INTO THE U.S.

UBS 10

Weekly Comment

Asian Corner Update:

Major Breakout in China … But Tactically Overbought!!
Driven by the rate cut decision of the Chinese central bank, the SSEC has hit a new reaction high and with the
break of the 2450 handle the Shanghai Composite has taken out a technical key level, which completes a major 2
years price bottom as well as it breaks the 2009 bear trend. More importantly, relative to the MSCI World the CSI300 is testing its 2009 underperformance trend, which sooner or later should be broken since relative to Europe we
already have a major relative breakout of China in place. Generally, in our recent comments we said that after a
tactical pull-back we would expect more gains into December but we actually did not expect an immediate break of the
2450/2550 key resistance into December. The rate cut decision was finally the trigger for this breakout and the question is
how sustainable the rally is. Tactically, the Chinese market is increasingly overbought and with a divergence forming on
the volume side we think that the market is on the way into an important tactical top into December. As a next target we
have 2700 in the SSEC, which is the 50% retracement of the 2009/2013 bear cycle. Similar to our call on the US market
and on Europe, we also expect in China and in Asia to see a significant correction starting very early in Q1.
However, the difference is that a) the current breakout generates a long-term technical buy signal in China and b)
China is about to break its underperformance trend from 2009, which is a completely different position.
Conclusion: Although we have been expecting higher prices into December, the momentum of the current rally and the
break of the 2450/2520 key resistance represents a positive surprise. Tactically, the market is overbought and we expect
a pull-back starting later in December and into Q1/Q2
Chart 29. ) CSI-300 Daily Chart
we also expect in the Chinese market to see a significant
washout. However, on the back of the current bullish
momentum, any bigger correction in the SSEC into H1
2015 (even if we were to see a negative surprise) will post
a significant higher low versus its summer bottom and
from a price structural standpoint this is bullish and
would confirm a major trend shift, which at the end of
the day suggests that a new major bull market in China
has just started.
This picture stands still in stark contrast to the rest of Asia
and the Emerging Market complex. The rebound from the
mid-October low is just corrective and in line with our recent
calls we continue to see most of Asia and EM's posting a
lower high versus its summer top into December, which is
bearish
medium-term
and
suggests
more
EM
underperformance into H1 2015.
Chart 30. ) Shanghai Composite Weekly Chart

NOT FOR DISTRIBUTION INTO THE U.S.

Chart 31. ) CSI-300 versus MSCI World

UBS 11

Weekly Comment

Asian Corner Update:
Chart 32. ) Hang Seng Daily Chart

The rebound in the Hang Seng is just corrective and with
a new reaction high into December it is very likely to see
a major divergence forming in the Hang Seng into
December, which leaves the risk to post a lower high into
December as a trigger for profit taking.

Chart 33. ) MSCI Emerging Market Daily Chart

The rebound pattern in the MSCI Emerging market is
purely corrective and the current rebound we see as wave
C of a classic corrective A-B-C counter trend reaction.
Next resistance and target region for our anticipated
December top is the area of 1025 to 1035.

Chart 34. ) MSCI Emerging Market versus MSCI World
M SCI EM $/M SCI World $

0.80

In August we already highlighted the corrective relative
rebound pattern in the MSCI Emerging Market versus the
MSCI World. In September the EM complex has broken
its March outperformance trend and we said it is very
likely to see minimum a re-test of the Q1 bottom if not
even a new relative low. After an initial re-test of the
March bottom we see the EM complex bouncing but
given the underlying weak pattern structure and our
expectation of a global risk off event in Q1, we expect to
see more underperformance in the EM world into H1
2014.

0.75

0.70

0.65

C

A
0.60

B
0.55
N

D

J

F

M

A

M

J

J

A

S

O

N

D

J

F

M

A

M

J

J

A

S

O N

Source: Thomson Reuters Datastream

NOT FOR DISTRIBUTION INTO THE U.S.

UBS 12

Weekly Comment

European Equity Market Update:

Europe Catching Up versus the US …
Our cyclical road map for Europe was that after our anticipated early November minor top we expected a pull back into
deeper/later November before starting tis next and final rebound into December. After a 2-week consolidation phase
Europe has started its next rally leg somewhat earlier than favoured and the pullback into deeper November was also
milder than initially feared, which is positive. Furthermore, from a relative standpoint, Europe (particularly the FTSE-100,
DAX and OMX) is catching up versus the US market and the SMI continues to stand out via its mega cap outperformance.
One consequence of this is that in most of core Europe our anticipated rebound from the mid-October bottom into later
December will end up higher as favored, and in the one or other market can even see a marginal new breakout, whereas in
the periphery the patterns remain corrective. The Euro Stoxx-50 can overshooting towards its summer high at around 3300
into later this week/early December, but on the back of the overshooting sentiment we expect Europe to head into an
important tactical top in early December, which means we would not chase Europe on current overbought levels, and if so
then only selectively. On the sector front the rally in cyclical sectors (which were our mid-October buy recommendation)
are extending their rebound and in banks we see a classic catch up rally towards the upper end of its multi month trading
range at around 205 to 210.
Chart 35. ) Euro Stoxx 50 Daily Chart

Euro Stoxx 50:
Instead of developing the expected deeper setback, the
Euro-Stoxx managed to trade sideways in the first half of
November and finally produced just a shallow pullback.
With Friday's broad supported upside break-out of that
trading range, the early November trading pattern finally
turned out to be a classic sideways consolidation pattern.
Because Friday's extension saw a leadership change
favoring cyclicals, the likelihood is high to see more
follow-through despite the increasingly overbought
situation on the index front. On the momentum indicator
side, a momentum divergence is not yet underway after
Friday's high momentum rally so that a re-test of the last
highs at 3289/3325 is potentially in the cards. However,
due to the extreme overbought defensive camp, further
short-term extension should see lower momentum and
ongoing selectivity with the focus shifting to the lagging
cyclical camp.
DAX-30 versus MSCI World:

Chart 36. ) DAX-30 versus MSCI World

The DAX has been one of the big underperformer versus
the MSCI World in 2014. It is interesting to see that the
whole underperformance pattern has been developing
into a very classic wave 5 pattern and with last week's
relative reversal the DAX has completed this wave 5
pattern.
Conclusion: Tactically, the DAX is trading in a
corrective relative rebound pattern versus the MSCI
world, which suggests that near-term we could still
see the one or other surprise on the upside before into
Q1/Q2
we
should
see
the
DAX
again
underperforming. However, after a completing a
major wave 5 cycle it is unlikely to see a new low
versus the MSCI World, which suggests that in later
2015 Germany and Europe as a whole should
outperform the world and in particularly the US
market.

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UBS 13

Weekly Comment

European Equity Market Update:
Chart 37. ) FTSE-100 Daily Chart

FTSE-100:
From a relative point of view, our stance on the FTSE100 was more constructive in anticipation of a
countertrend rally in the commodity related themes.

Chart 38. ) DAX-30 Daily Chart

Interrupted by a very short-lived pullback last week, the
FTSE-100 extended its steep advance off from the midOctober low. Even if we see the expected further support
from the commodity related sectors, the steep advance
looks unsustainable and we have to go back to June/July
2013 to find a similar rally leg in terms of time and
extension, which finally triggered a multi-week lasting
consolidation phase. In terms of price, the major
resistance is defined by the year highs at around 6880,
which represents the technical cap for the current
unsustainable steep advance. A new trading support is
offered at 6641.
DAX-30:
The DAX managed to hold above 9148, which
represented the potential trigger for another correction
leg. Friday's high momentum rally negated the divergence
on the indicator side, which negated on the one hand the
toppish setup on that front. On the other hand, the current
rally leg is now heading toward its last reaction high at
9891, and the year high at 10050 is coming within
striking distance, which represents a major technical cap;
on the back of an increasingly overbought situation on the
daily chart basis, the index is not really in a position
where major breakouts usually occur. In other words a retest of the last highs is potentially in the cards but a
sustainable breakout seems unlikely.

Chart 39. ) Swiss Market Index Daily Chart

Swiss Market Index:
The SMI is one of the very few country indices, which
produced a fresh year high in November, partly due to the
healthcare and food mega caps plus the most recent
bounce in cyclicals and financials.
The rally off from the mid-October low is the strongest 4week advance since Q2 2013, which was followed by a
significant correction. Furthermore, in the SMI we have a
momentum divergence developing, and with regard to the
recent shift favoring cyclicals, the SMI is expected to face
headwind in relative and absolute terms by its overbought
leaders in the healthcare and food segments. This should
limit the impact of further short-term strength in the
cyclical camp. In terms of price, the last high at 8875
defines the obvious key support.

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UBS 14

Weekly Comment

STOXX Europe 600 Index Sector Overview:

NOT FOR DISTRIBUTION INTO THE U.S.

UBS 15

Weekly Comment

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

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UBS 16

Weekly Comment

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