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January 2017 Technical Market Outlook Peter Lee – Chief Technical Strategist CIO Wealth Management Research All charts and data are sourced from Thomson Reuters, Bloomberg, and UBS CIO WMR as of 24 January 2017 This report has been prepared by UBS Financial Services Inc. (UBS FS). Please see important disclaimers and disclosures that begin on page 29.

January 2017 Technical Market · PDF fileJanuary 2017 Technical Market Outlook ... and UBS CIO WMR as of 24 January 2017 This report has been prepared by UBS Financial Services Inc

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Page 1: January 2017 Technical Market · PDF fileJanuary 2017 Technical Market Outlook ... and UBS CIO WMR as of 24 January 2017 This report has been prepared by UBS Financial Services Inc

January 2017 Technical Market Outlook

Peter Lee – Chief Technical Strategist

CIO Wealth Management Research

All charts and data are sourced from Thomson Reuters, Bloomberg, and UBS CIO WMR as of 24 January 2017

This report has been prepared by UBS Financial Services Inc. (UBS FS). Please see important disclaimers and disclosures that begin on page 29.

Page 2: January 2017 Technical Market · PDF fileJanuary 2017 Technical Market Outlook ... and UBS CIO WMR as of 24 January 2017 This report has been prepared by UBS Financial Services Inc

SPX Index: Structural Bull confirmed – Next targets 2,509/3,000

SPX is transitioning from a 13-year structural bear/trading range trend (2000-2013) to the next structural bull trend as the result of the May 2013 technical breakout at 1,576-1,600 and most important, the confirmation of a positive outside year in 2016. Since the 2000-20013 technical base is nearly 909-points this renders a minimum SPX measured target of 2,446-2,509 but can overshoot to as high as 3,000 under strong buying pressure. Despite the current gains of 43% from its May 2013 breakout at 1,600, it appears that this structural bull may still be in the early stages of development. Why? Prior US structural trends tend to sustain for 8 to 20 years. This would then imply another 4-16 years is possible before a major market top occurs. Although the past two structural breakouts in 1949 and 1982, respectively led to impressive SPX gains of 353% in 15-years and 1,000% in 17-years, SPX...

… also witnessed major drawdowns spanning from -14.5% to -36%. If today's structural bull trend follows a similar path to that of the1949-1965 structural bull then you can expect SPX to also experience higher frequencies of drawdowns as compared to the drawdowns from 1982-2000 structural bull trend. The prior major structural breakout during May 2013 at 1,576-1,600 as well as the recent 2016 positive outside year lows at 1,810 may play a crucial role in the years ahead acting a floor or major support on any future market corrections.

Positive Outside Years also developed in many key US Indexes during 2016, This reaffirms the leadership roles US equities will play in the next structural bull trend in global equities. The following positive outside years hint of leadership:

RUT 3000, RUT 2000, RUT 1000, NASDAQ Composite, DJ Composite, and Midcap 400.

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SPX Index: Intermediate-term Uptrend Channels remain intact

SPX Technical Measured Targets:

Jul 2016 1st breakout above 2,121 � +129-points suggests 2,250Nov 2016 breakout above 2,194 � +109-points upside to 2,303Jul 2016 2nd breakout above 2,121-2,135 � +325-points to 2,446May 2013 breakout above 1,576-1,600 � +909-points or 2,485-2,509

SPX Uptrend Channel Extensions:

1st uptrend channel = 2,282, 2nd uptrend channel = 2,376, and the 3rd

uptrend channel = 2,471.

SPX Technical Risk Levels:

2,234-2,242, 2,182-2,194, 2,159-2,172, 2,116-2,135, 2,084, 2,036-2,043,1,973-1,992, 1,918-1,932, 1,867-1,872,1,810-1,812, 1,752, and 1,576-1,600.

With only two exceptions - during late-2011 (i.e., sovereign debt crisis /US Debt ceiling debacle) and early-2016 global market correction (i.e., global recession fears) SPX have closely tracked its respective uptrend channels dating back to the 2009 major market bottom (666.79). As long as these dominant intermediate term uptrend channels remain intact, they will likely provide us with valuable clues to future SPX targets as well as downside risks in the years ahead.

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SPX Index: Near-term consolidation before the next major rally

On a near-term basis the recent 9-week Presidential Election rally (9.52%) closely resembles the 7-week BRexit vote rally (10.15%) from both a duration and magnitude perspective. In addition, the current sharp contraction in the Bollinger Bands closely resembles the scenario that developed during the Aug 2016 timeframe. A small head/shoulders bottom has developed in the past month. A convincing breakout above neckline resistance at 2,285 renders next SPX target towards 2,336.

The momentum indicator (MACD) has begun to negatively diverge (lower-low pattern) from its price pattern (higher-high pattern). Failure to breakout above the top of its 1-year uptrend channel 2,284-2,300 coupled with a violation of initial support at 2,234 warns of the start of a consolidation to 2,149-2,173 or the 150-day/200-day and the bottom of its pivotal Feb 2016 uptrend channel.

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MSCI World Index: Above 1,814 negates negative outside mo.

Negative Outside Year – 2015

No Outside Year during 2016

MSCI World Index – A convincing move above 1,814 would negate the 2015 negative outside year pattern. This breakout is technically important as this suggests a new all-time high triggering the next sustainable rally toward 1,922-1,987 or a retest of the top of its long-term uptrend channels. Key support is at 1,750-1,766 and below this to 1,545-1,560. The 2016 lows at 1,460 remains crucial support.

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Value Line Geometric: Above 523.65 confirms a major breakout

Negative Outside Year - 2015

Negation of a Triple Top?

Apr '08 high = 508.39 Jul '07 high = 508.42 Apr '15 high = 523.65

Oct '90 low = 179.55 Oct '01 low = 219.51 Mar '09 low = 152.74

Negative Outside Year - 1998

Negative Outside Year - 1987

A convincing move above 523.65 confirms a major breakout thereby negating the 1998 and 2015 negative outside years. This would also establish a new all-time high and negates a triple top pattern. Does this technical development confirms the start of the next major rally in important the Value Geometric Index?

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MSCI Emerging Markets Index: Technical oversold rallies

A negative outside year on 2011and 3 triangle breakdownsduring 2015 suggest a bearishtechnical trend in the EmergingMarkets (EM) and extensivetechnical work is required torepair the damages incurred.Nonetheless, the ability of EM totrade above key initial resistanceat 930 +/- 10 signals a rallytoward 960 or the bottom of theprior triangle breakdown andpossibly to as high as 1,016-1,044or the top of the trianglepatterns. Near-term tradingranges is between 825-830 and930 +/- 10. Medium term rangeis 760-770 and 1,000-1,100 andthe longer-term range is 660-687and 1,190-1,253.

Negative Outside Year - 2011

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MSCI EAFE Index – H/S Top and German DAX Index - Breakout

Head and Shoulders (H/S) Tops:

1992 H/S top: Head=2,399 (Dec2007 highs), left shoulder=1,774(Jan 2000 highs), right shoulder=2,000 (Jul 2014 highs), and necklinesupport=927-1,000

2009 H/S top: Head=2,000 (Jul2014 highs), left shoulder=1,812(2011 highs), right shoulder=1,741-1,791 (Feb/Sep 2016 highs), andneckline support =1,400

Ascending Triangle Breakout:

A 13-year bullish ascending trianglebreakout above 8,152-8,165 (May 2013)suggests +5,963 points for a minimum DAXtechnical target of 14,115-14,128, overtime. However, on a near-to-intermediateterm basis a technical base is likely todevelop between 8,335-8,699 (2014/2016lows) and 12,391 (2015 highs).

To negate the 1992 H/S Top, EAFE Index would need to trade convincingly above the left/right shoulders at 1,774-2,000. To negate 2009 H/S Top EAFE would need to surge above its respective left/right shoulders at 1,812-1,956.

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Shanghai Composite (Stabilizing) / Nikkei 225 Avg. (Recovery)

The ability of Shanghai Composite (SSE)Index to stay above its 24-year uptrend(1,705) and its 12-year uptrend channel(2,185) bode well for a recovery.However, SSE will likely encounterformidable resistance at 3,500-3,600coinciding with the top of its long-termchannel and 2009/2016 highs. The38.2% retracement from the 2015-2016decline is also residing at 3,609. Abreakout here allows for a recovery toa high as the 61.8% retracement at4,200. Key support moves up to as highas 3,000-3,050 and below this to the2016 lows (2,638-2,781).

A 24-year falling wedge breakout above 15,750 in Nov 2014confirms the start of a sustainable intermediate-term butpotentially a longer-term recovery in Japanese equities (Nikkei225). Next key challenge is to convincingly breakout above keyinitial resistance at 20,500-21,500 and then 22,751-22,976 (2015highs and the 50% retracement from its 1989-2008 decline). Keysupport remains along the recent 2014/2016 lows at 13,885-14,864.

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US Dollar Index (DXY): Falling Wedge Breakout = 106.5/109

Two major technical breakouts confirmed an intermediate-to-longer term recovery in theUS Dollar Index (DXY). The 1985 falling wedge breakout at 87.25 (Oct '14) and asymmetrical triangle breakout at 85 (Sep '14) render technical targets to 101.80–103.82(near-term), 106.43-106.56 (medium-term), 109.14 (intermediate), and then to 118–121(long-term). Similar to the last major DXY bull rally during mid-1990s to early-2000s, therecent 2-year consolidation (low-90s and the low-100s) can set the stage for one final rally.However, an overbought condition has developed into this rally. Failure to clear above101.80-103.82 hints of a consolidation to key supports: 99.25-100.5, 97.5-98.5, 96-96.5, 91.92-92.62, 89.62, and 83-84. Despite the major downtrend breakout, a potential head/shoulderstop pattern has developed since the late-1980s. Will major resistance develop near the leftand right shoulders at 106.5?

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US Dollar Index (DXY): Negative outside week = Correction

Although the longer-term recovery in DXY will likely continue longer-term, a negative outsideweek on 1/6/17 coupled with the recent violation of the prior technical breakout at 100.30-100.51 warn of a near-to-medium term consolidation possibly to 97.87-99.27 and below this tothe low-to-mid 90s under the scenario of a deep DXY correction. The high-90s coincides closelywith the 30-week moving average (98.39) as well as the 38.2-50% retracements from the 2016-2017 rally at 99.27/97.87. The bottom of the May 2016 uptrend channel at 97.5 as well as the61.8% retracement at 96.47 provide key secondary support. Trading above 103.82 would signalthe resumption of the DXY recovery toward next key resistance at 106.5-109.

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USD/JPY: Head and Shoulders Bottom suggests a turnaround

The USDJPY breakout of its 1998 downtrend at 105 (Sep 2014) is technicallysignificant as this signals the start of a major JPY recovery. Although the ensuingrally quickly stalled near 125.85 (Jun '15) or just below key resistance at 124.16–126.82 a potential 17-year head/shoulders bottom hints of a longer-term technicalbase. Key neckline resistance remains at 124-126. The sharp correction over the pastyear has led to a successful test of key support near the extension of its 1998breakout and the 50% retracement of 2011–2015 rally at 99–101. This has alsosolidified a right shoulder to a head/shoulders bottom. Recent failure to surpass keyresistance at 119.53 (76.4% retracement) and the 1990 downtrend (119.5) suggest aconsolidation to key initial support at 109-111 and below this to 104.5-107.

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EUR/USD: Head and Shoulders Top warns of continued selling

The market actions of EURUSD over the past 15 years is eerily similar to the technical conditionsduring the mid-1980s to early 2000s as both market witnessed a major triangle/head and shoulderstop breakdown. The recent violation of key support at 1.21 (Jan '15) warns of a major top. Inaddition, the failure of a 2-year technical base between 1.0456-1.0536 and 116-117 1.0456 signals thenext EURUSD decline to 0.99–1.01 and below this to 0.9595 and then to 0.8225, over time.

.

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US 10-Yr Treasury yields – Positive Outside Year/double bottom

A positive outside year in 2016 warns of the potential for astructural reversal in the 10-year Treasury Yields (TNX).However, the 30-plus year structural downtrend channel stillremains intact between -0.10-.048% and 3.00-3.12%. Toconfirm a structural trend reversal TNX must clear above thisresistance. An overbought condition may lead to acorrection in TNX towards key support along 2.0-2.25%.Trading above 3.00-3.12% confirms a structural breakout.Height of channel is 325-350 BP. A breakout warns of ratesto 4.0-4.1, 4.74, 5.15-5.33, 6.33-6.92%.

A double bottom pattern has developed over the past 4-years between 1.32-1.38 and 3.01-3.04. A convincingmove above 3.04/3.14% confirms a breakout and warnsof much higher US interest rates (TNX) to 3.77-4.01%(2009/2010/2011 highs) and above this to 4.74-5.33%(23.6% retracement from its 1981-2016 decline, measuredtarget based on double bottom breakout and the2006/2007 highs). Longer-term resistance remains near6.33% (channel measured move above 3.14%) and thento the 38.2% retracement (6.86%). Key supports: 2.27-2.31, 2.15-2.17, 2.00, 1.73-1.85, 1.45-1.54, and 1.32-1.38%.

Negative Outside Years = 1989 and 2007

Positive Outside Year 2016

Negative Outside Months = Dec 1997, Jul 1984, Aug 1984, Jun 1986, Oct 1987, Jan 1994, Jul 2001, Dec 2002, Jul 2011, Mar 2013, Jan 2014

Positive Outside Months = Sep 1986, Mar 1987, Aug 1990, Oct 1992, Oct 1993, Oct 2002, Feb 2005, Jun 2006, May 2007, May 2013

Double bottom technical base = 162 BP Breakout above 3.04 ���� 4.76%

Channel pattern height = 319 BP Breakout above 3.14 ���� 6.33%

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US Treasury yields - 30-Yr, 5-Yr, and 2-Yr and US T-Yield Curve

Negative Outside Year in 2007

No Positive Outside Year 2016

Above 3.26/3.53-3.73% ���� 4.01-4.14/4.79-4.86/5.20-5.44% Key supports ���� 2.44-2.51/2.09-2.22%/0.78-1.27%

Negative Outside Year in 2007

Positive Outside Year in 2016

Above 1.81-1.88% ����2.73-2.99/3.43-3.77/4.14-4.56/5.24-5.26% Key supports ���� 0.89-1.12/0.54%

The US Treasury Yield Curve shape is currently in an upward sloping curve or a positive yield curve. Since the slope gives clues as to the direction of future interest rate trends an upward sloping curve generally indicates that the financial markets expect higher future interest rates. That is, investors expect the economy to continue to recover and possibly reflate. Note that the intermediate term maturities (3-7 years) have steepened signaling vulnerability along the belly of the US Treasury curve.

Above 0.90-1.05% ���� 1.36-1.45/2.11/2.45-2.5/2.72% Key supports ���� 0.90-1.05/0.75-0.80/0.50-0.62/0.15-0.24%

The recent breakout above 0.90-1.05% warns of 2-year US Treasury yields trending up to as high as 2.45-2.50%, over time to retest its long-term structural downtrend.

The 30-year Treasury yields (TYX) did not confirm a positive outside year in 2016. However, a structural breakout is confirmed on a convincing move above 3.53- 3.73%.

The intermediate maturities (US 5-year – FVX) has broken above the top of its 4-year trading range between 0.89-1.12% and 1.81-1.88%. This suggests a test of the top of structural downtrend at 2.73-2.98%.

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US 10-2 Year Treasury yields / Ten-year Treasury-TIPS Breakeven

For the past four years the US 5-year Treasuryyields (FVX) have been confined to a tighttrading range between 0.89-1.22% and 1.83-1.86%. The recent

The recent 4-year downtrend channel breakout above 1.75-1.77 signalsthe expansion of the breakeven rate or the expected inflation rate asdenoted by the 10-year Treasury yield minus the TIPS real yield spread.Trading above 2.03-2.09 can extend the spreads to 2.30-2.46 and abovethis to 2.60-2.75 or the top of its 12-year range as well as the highsfrom 2005, 2006, 2008, 2011, 2012 and 2013. Key initial support rises to1.86-1.95, 1.70-1.72, 1.54-1.58, 1.31-1.38 and then 1.20.

The 2-year Treasury yields bottomedas early as late-2011 while the 10-year Treasury yields trended lowerin the direction of its seculardowntrend. As a result the 10-2 yearyield spreads contracted sharply to alow of 0.78 (Aug 2016) or just aboveits pivotal 2000 uptrend (0.66).

A subsequent 2013 downtrendbreakout in Oct 2016 (0.90) and asurge above 1.25 suggests 10-2year spreads can expand to 1.70-1.90 and above this to 2.40-2.64.

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Bloomberg Commodities / WTI Crude Oil – U-type Recoveries

The broad based Bloomberg Commodities Index have found a major bottom. The ability to maintain 90-92 solidifies a U-type recovery andsuggests targets to 96-98 (near-term), 101.5-105.5 (secondary) and then 111.5-113.5 (medium-term). The WTI Crude Oil has also establisheda major bottom. A cup and handle pattern and/or head/shoulders suggests a sustainable recovery. A convincing breakout above 51-52reaffirms the 2016 bottom, allowing for a sustainable rally to the mid-50s (near-term), 62.58 (secondary) and then 67-60 (medium-term).

After declining –70% from its Jul2008 high (238.52), the BloombergCommodities (BBG) Index isentering into the early stages of aU-type bottom recovery. A majorbottom is further confirmed via abreakout above 90-92 or the top ofa 1-year cup and handle pattern. Abreakout here reaffirms a recoveryto 96-98 (near-term), 101.5-105.5(secondary), 111.5-113.5 (medium-term) and 123-124.5 (long-term).Key supports are: 85.5-87.5, 80-82.5,75.5-76, and 72-73.

WTI crude oil appears to have found amajor bottom along 26.05–26.18 (Jan/Feb'16 lows) signaling the start of a U–typerecovery. Over the past year, a head andshoulders bottom and/or a cup andhandle pattern further reaffirms atechnical base. A convincing breakoutabove 51-52 renders technical targets to55.25-57.25 (near-term), 62.58(secondary), 67-69 (medium) and 76.53-84(long-term). Key supports: 50-51, 47-49,42-44, 39.19, 34-35, 31-32 and 25-27.

MACD indicator is headedtoward a major test ofresistance along the top of its2018 downtrend. A breakouthere further reaffirms asustainable U-type recovery.

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Gold - another technical base / Copper - bullish flag/pennant

Gold is entering into another technical base between 1,046-1,124 or its recent lows and 1,325-1,375 or its recent highs. Copper is showingtechnical signs of a sustainable intermediate term recovery as evident by the flag/pennant pattern over the past three months. Aconvincing surge above 2.72 confirms breakout and renders upside targets to 2.85 (near-term), 2.96-3.0 (medium-term) and then to as highas 3.21-3.28 (longer-term). Key initial support is visible at 2.40-2.50 or the prior Nov 2016 breakout and below this to 2.25-2.28.

Gold has successfully bounced off of keysupport along the bottom of its 3-yeardowntrend channel (1,040–1,045). Thisprevented a deeper set back 971-1,015 andpromptly led to a technical oversold rallythat has stalled near key resistance at1,377-1,391 coinciding with the top of the2011 downtrend, the 38.2% retracementfrom its 2011-2015 decline and the Mar '14highs. We now expect Gold to begin toreestablish a technical base between1,046-1,124 and 1,325-1,375. .

Copper declined 58% from its 2011 high(4.63) finding a major low at 1.94 (Jan'16). The ability to find support near the76.4% retracement (2.04) from its 2008–2011 rally and the 2001 uptrend (2.00) ledto a recovery. The recent surge above keysecondary resistance at 2.45–2.57reinforces a bottom prompting recentrally to 2.72. An overbought conditionhints of a consolidation that resembles abullish flag/pennant pattern. A breakoutabove 2.72 renders next upside to 2.85(near-term), 2.96-3.0 (medium) and then3.21-3.28 (long-term). The prior breakoutat 2.40-2.50 is key initial support andbelow this to secondary support at 2.25-2.28 (Nov '16 gap up breakout). The 2016lows and 2001 uptrend at 1.94-2.02 ispivotal support.

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S&P 500 Sectors: From 2000 - Leadership and Lagging Sectors

From 2000-present the leadership S&P 500 sectors are: Consumer Staples (1.68), Energy (1.66) and Healthcare (1.57). Does this then imply that these sectors may begin to lag their counterparts in the next structural trend.

The lagging S&P 500 Sectors are: Telecom Services (0.34), Info Technology (0.67), and Financials (0.77). Does this then imply that these will be the new leadership sectors in the next structural trend?

Historically, indexed relative strength analysis tends to lead pivotal price changes possibly months, quarters and even years in advance. It is also important to note that there is a tendency at the beginning of a new structural bull, bear or trading range market for the emergence of new leadership S&P 500 sector(s) as well S&P 500 sector(s) beginning to underperform or lag their S&P 500 counterparts. The key to outperformance is to ability to recognize these subtle changes in S&P 500 leadership roles.

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S&P 500 Sectors: From Mar 2009 – Leadership/Lagging Sectors

From the Mar 2009 bottom (6676.79) are the 10 S&P 500 sectors benchmarked to SPX (1.00). The leadership S&P sectors are: Consumer Discretionary (1.59), Financials (1.42), Info Technology (1.24) and Industrials (1.23). The S&P 500 laggards are: Energy (0.53), Telecom Services (0.56), Utilities (0.63), Consumer Staples ( 0.80).

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S&P 500 Sectors: From 2013 - Leadership and Lagging Sectors

From May 2013 or a major structural SPX breakout at 1,576-1,600 the following are the leadership S&P 500 sectors: Info Technology (1.21), Financials (1.08), Consumer Discretionary (1.07) and Healthcare (1.02).

The lagging S&P 500 Sectors are: Energy (0.66), Telecom Services (0.73), and Utilities (0.84).

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S&P 500 Sectors: From 2016 - Leadership and Lagging Sectors

From 2/11/16 low the leadership S&P 500 sectors are: Financials (1.17), Materials (1.08), Energy (1.08), Info Technology (1.06), and Industrials (1.04).

The lagging S&P 500 Sectors are: Utilities (0.85), Consumer Staples (0.86), Telecom Services (0.87), and Healthcare (0.87).

As we review the 4 time periods we find that there is indeed subtle rotations taking place below the surface. That is, there may be structural changes developing in key S&P 500 Sectors that will likely drive performances in the years ahead. Two particular S&P 500 Sectors appear to be emerging as the relative strength leaders in the next structural trend (bull) – Financials and Info Technology. Four other S&P 500 sectors offer tactical cyclical opportunities – Industrials, Materials, Energy and Consumer Discretionary. Three S&P 500 are showing strong technical signs of a lagging tendencies – Healthcare, Utilities, Consumer Staples and Telecom Services.

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Contact Information

UBS Financial Services Inc.CIO Wealth Management ResearchNY, NY 10019www.ubs.com

Peter LeeUBS Financial Services [email protected]–713–8888 Ext 01

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Appendix

% +or– Moving Avg (DMA) The percentage above or below the moving average (see Moving Average) is used to help measure an overbought or oversold condition and is a component of risk management. It is calculated by taking the difference between the group price and its 30-week moving average (see below), and then dividing by the 30-week moving average times 100.

30-week Moving Average Also known as the 30-week line or 150–dayline), this is one of the most popular and respected moving average indicators (see Moving Average) in technical circles. It is calculated by totaling the latest 30 weekly (usually Friday closing) prices and dividing by 30 to arrive at the average. Each week, the most recent week’s figure is added to the total, and the price level from 30 weeks ago is subtracted – hence the term “moving.” Please note that a breakout above or breakdown below this line does not, in and of itself, constitute a buy or sell signal.

Adjusted Relative Strength (ARS) Number gives a 50% weighting to the 1-month relative strength, 30% to the 3-month, and 20% to the 6-month numbers to arrive at a single weighted number.

Base A chart pattern marking a period of accumulation following a downtrend. The larger the base, the greater the upside potential following its completion. A base can take many forms.

Beta A measure of volatility of a security as it relates to the market as a whole. Beta is often calculated using regression analysis. A beta is basically the tendency of a security’s returns to respond to swings in the market. A beta of 1 indicates that the security’s price will move with the market. A beta of less than 1 means the security will be less volatile than the market. A beta of greater than 1 implies that the security’s price will be more volatile than the market.

Blow off stage to a major rally This is often the last stage of a speculative bubble to a major rally. The blow off phase tends to be steep, but short–lived that often affords little opportunity for investors/traders to exit their positions. As price of a security or an assetadvanced to an unsustainable level via a parabolic uptrend this give rise to the bursting of the speculative bubble resulting a quick and dramatic decline as investors/traders try to exit the market/security at the same time.

Breakdown

Breakout A technical term indicating an upside resolution of a chart pattern. Breakouts can take many forms, and their degree of importance is determined by the significance of the chart pattern which preceded it.

A technical term indicating a downside resolution of a chart pattern. Its significance is determined by the same factors governing a breakout.

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A technical analysis term used to describe potential areas of support (price stops declining) or resistance (price stops rising) on the charts. After a strong rally or decline there is a tendency for a security to retrace a certain portion of itsprior move (up or down). Fibonacci retracements use horizontal lines to indicate areas of support or resistance at the key Fibonacci levels before continuing in the original direction. These levels are computed by taking the two extreme points and then dividing the vertical distance by the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8% and 100%.

Fibonacci Retracement Level

A trend line connecting successively lower peaks for a stock (or market). Its technical significance is determined by the same factors governing an uptrend line.

Downtrend Line

The opposite of a golden cross, this is a crossover on the chart resulting from a security’s shorter-term moving average falling below its longer-term moving average. Technicians often see this as a bearish technical sign indicating the market has turned negative on the security.

Death Cross

A chart pattern comprised of two parallel trend lines, which form a trading band. Channels take the form of uptrend, downtrend and horizontal.

Channel

Forecast Stock Return is defined as expected percentage price appreciation plus gross dividend yield over the next 12 months.

FSR

Fan reversal pattern The fan formation is a technical pattern that is based on the use of multiple trend lines to denote a major trend reversal. The fan pattern gets its name as it basically resembles a “fan”. It should have a minimum of three trend lines (uptrends or downtrends). The break out/break down of the third downtrend/uptrend often completes the fan pattern and signals the start of a major trend reversal. The starting point of these trend lines should come from a significant peak or a significant trough.

Broadening Top Formation The Broadening top is a rare technical formation that resembles an inverted triangle pattern. It is formed by price swings that are increasingly widening and expanding volume. The most common of these broadening top patterns are the three ascending peaks and two descending troughs. The combination of wide price swings and increasing volume often convey an increasingly volatile and emotional market that's basically out of control. This pattern is often associated with market tops rather than market bottoms. The confirmation of the Broadening top occurs when the price violates the second of these two troughs.

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A crossover on the chart that involves a security’s shorter-term moving average (such as the 50–day moving average) crossing above its longer-term moving average (such as the 150–day or 200–day moving average). Technicians often interpret this crossing of two moving averages as a bullish technical sign that suggests the market has turned in favor of the security.

Golden Cross

An open space in a chart created when a stock (or market) opens either higher than its highest level attained during the prior session (referred to as a gap up or an upside chart gap) or lower than its lowest level reached during the prior day (called a gap down or a downside chart gap). Some gaps are caused by events and should be ignored: ex–dividend gaps, new share issues, and expiration of futures contracts.

Gap

Head–and–Shoulders Pattern This technical formation is one of the best known of the reversal patterns. There are two types of head–and–shoulders patterns that often appear on the charts: H/S top and H/S bottom. Both of these patterns often denote the process of a reversal either from a bullish or bearish trend. Head–and–shoulders formation often is comprised of a left shoulder, a head, and a right shoulder, and a line drawn across its shoulders defines its neckline. The breaking of the neckline to the upside confirms a head–and–shoulders bottom breakout, which signals the start of a bullish reversal favoring higher prices. The violation of neckline to the downside validates a head–and–shoulders top, reaffirming a bearish reversal of lower prices.

Internal Trend Line A single trend line connecting at least several high and low points for a stock (or market) over time.

Linear Regression Band A common statistical technique often used by investors/traders to better forecast values by utilizing the least squares fit method to plot a trend line. A linear regression band consists of upper and lower bands. These bands are calculated by computing the number of standard deviations above or below of the regression line.

Moving Average (m.a.) This is a technical indicator frequently used in technical analysis to show the average value of a security’s price over a set period of time. This tool is designed to smooth out a stock’s (or market’s) shorter-term fluctuations to provide a better picture of an underlying trend. Moving averages generally are used to measure momentum and define areas of possible support and resistance. Moving averages can be helpful as they emphasize the direction of the dominant or prevailing trend and also tend to smooth out price and volume fluctuations, or “noise,” giving the trader or investor a clearer picture of the security in question. Many moving averages exist.

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Relative strength is a performance comparison between a sector, group, or stock and the S&P 500 Index over a specified time frame. Our time frame is often a one–, three–, and six-month basis but does vary according to investment orientation.

Relative Strength

When one day’s range (high and low) exceeds the prior day’s range, and the stock (or market) in question closes near its daily peak, this is referred to as a positive “outside” day. A negative “outside” day would be recorded if the stock (or index) finished near its daily low after having a wider range than the prior session. The same rule can be applied on a weekly and monthly basis as well.

Positive/Negative “Outside” Day

Opposite of Overbought. A technical condition that occurs when the price of a security has fallen to such a degree that the price becomes undervalued or has reached the lower band of its trading range prompting a potential rally.

Oversold

A technical condition in which the price of a security has risen to such a degree that the price becomes overvalued or has reached the upper band of its trading range resulting in a potential pullback in price.

Overbought

This is a trend line that is drawn across the bottoms or tops of the left shoulder, the head and the right shoulder of a potential head-and-shoulders bottom or top pattern. When prices break through this neckline support level and continue falling after forming the right shoulder, it confirms a head-and-shoulders top formation. Conversely, neckline resistance is a trend line drawn across the tops of the left shoulder, the head and the right shoulder. When prices break above this neckline resistance level and keep on rising, it typically completes the head-and-shoulders bottom pattern.

Neckline Support/Resistance

Market Return Assumption is defined as the one-year local market interest rate plus 5% (a proxy for the equity risk premium and not a forecast).

MRA

RRD Rating/Return Divergence is automatically appended to the rating when stock price movement has caused the prevailing rating to differ from that which would be assigned according to the rating system and will be removed when there is no longer a divergence, either through market movement or analyst intervention.

Support An area where increased buying interest is likely to develop during a decline. These points, which can take several forms (minor, major, etc.), often provide downside protection for an issue in a primary uptrend, but only temporary relief to an issue in a primary uptrend, during which time many support levels are often broken.

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There are three different types of Triangle patterns – Symmetrical, Descending and Ascending. Symmetrical Triangle is considered to be a continuation pattern that often signals a period of consolidation in a trend followed by a resumption of the prior trend. It is formed by the convergence of a descending trend and an ascending trend. An Ascending Triangle is a bullish pattern, which is denoted by two trend lines – a flat trend line and an ascending uptrend line. A Descending Triangle is a bearish pattern. It is the opposite of the Ascending Triangle in that there is a flat trend line and a downward sloping downtrend line.

Triangle Patterns

A chart pattern marking a period of distribution following an uptrend. The larger the top, the greater the downside potential following its completion. It, too, can take many forms.

Top

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Disclaimer

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