See UBS chart update :
Still Selective Bounce Into Deeper August Expected!
• US Trading: Last Friday, the SPX tested its 200-day moving average for the 3rd time in 4 weeks and the warning signals in the bigger picture are further increasing. The early cyclical semiconductors remain weak. Biotech, healthcare and the Russell- 2000 are sitting on pivotal support and with last week's breakdown in media stocks, the SPX media is the next key sector sitting on the edge (2011 trend support). Nonetheless, on a short-term basis the sentiment is too negative; and following our cyclical model we continue to believe in another bounce attempt, led by a rebound in cyclical themes and commodity sectors, into deeper August before we expect the SPX to start a real breakdown campaign into later August and into September.
• The July 27th reaction low at 2063 remains a short-term key support in the SPX. As long as it holds, we expect a selective overshooting into deeper August to at least test the 2134 all-time high and best case to overshoot towards 2150 to 2160. Having said that, we continue to think that if we see a new SPX high the breakout is unlikely to remain sustainable on the back of the weak breadth, so that all in all the likelihood of seeing a classic false breakout into August is in our view high. On the downside, a break of 2063 would be initially negative and a break of the late June low at 2044 would be outright bearish, implying that a major top in the SPX is in place with immediate downside to 1980/1970.
• US Strategy: From a cyclical aspect, we have been expecting the US market to move into an important summer cycle top as the basis of a relatively short but sharp correction process into a later Q3/early Q4 bottom. As we have been saying over the last few weeks, even if we were to see another short-term positive surprise in the SPX (hitting a marginal new high into August), we are sticking to the high conviction call of our 2015 strategy and continue to see the risk of a 15% correction, which from an Elliott Wave perspective should correct the 2011 bull cycle (wave 4 of a large degree) before resuming the underlying bull market into H1 2016. In early June, the MSCI World completed a double-top, implying that globally our expected summer top is already in place! With rising cross-asset volatility, weak market breadth, and increasing pressure on the macro side (too strong US dollar and bonds sitting on the edge), the air over the SPX is getting thin, and we continue to believe that particularly September into mid-October will be very weak for the US market.
• European Trading: The technical setup in Europe is unchanged. Although last week we saw Europe outperforming the US, it does not change the selective picture in Europe. In line with our recent call we continue to believe into more near-term strength into deeper August, where we can see selective new highs/breakouts in the SMI (profits from weaker CHF), FTSE MIB, IBEX, AEX and the CAC (which has hit a new reaction high versus the MSCI World), whereas the DAX, FTSE-100, OMX, PSI-20 and ATX will very likely just post a lower high into deeper/later August as the basis for a next tactical setback into September. Our broader view is unchanged. Particularly with the recent new relative breakdown of EU cyclicals versus defensives it's unlikely to see a new major breakout campaign of Europe in relative terms (versus the US) as well as in absolute terms, so at the end of the day we see the current rebound capped into deeper August.
• Inter Market Analysis: Strategically, and following our cyclical model, the Q1 reversal in the US bond market represents a major reversal towards higher yields into H1 2016. Tactically, in late June, US and EU bonds were oversold and we expected a bounce into July before starting its next down leg into deeper/later summer. The rebound in bonds has been extending in price and time but with the corrective style of the rebound, following our cyclical model, and with the US yield curve rolling over our core view is unchanged. With the US 2-Year and 5-Year Treasury sitting at or near key breakout levels, and the 10- Year Future posting a lower higher versus its early August top we see bonds vulnerable for a next down test into September. A break of 126.54 in the US 10-Year Treasury would be short-term bearish and imply a retest of the June bottom at 125.
• Our view on commodities and the US dollar is unchanged. In line with our last week's call we see an initial bounce in commodities, related sector themes, gold and gold mines! The move in most commodities we see as just a corrective (wave 4) rebound into late August before expecting a final bear move starting, so the underlying trend remains down (Dollar bullish) into later Q3. However, in contrast to copper and oil we think that gold/silver and gold mines are just about to complete their lows of the year. With the break of $1100 we expect a test of $1132 and a re-break above this level would give us increasing conviction that a major low is in place! We could continue to buy the dips in gold, silver and gold mines!!