Stock market rally fireworks · 11/19/2007 · support- and resistance zones - at respectively 1.35% and 1.95% - stay intact. In the bigger picture, a downward trend, with lower

TECHNICAL TREND OUTLOOK

Independent research on asset allocation, global financial markets,

politics and FX & interest rates

Stock market rally

fireworks

Thursday, 7 November 2019 | Contents

1. EXECUtIVE SUMMARY 2

2. MARKET TO WATCH HIGHLIGHT 4

Europe Stoxx 600 index 4

3. STOCK MARKETS 5

US 5

S&P 500 index and other US indices 5

EUROPE 8

Euro Stoxx 50 index 8

DAX 30 9

Swiss market index (SMI 20) 10

UK FTSE 100 10

JAPAN 11

Nikkei 225 index 11

EMERGING MARKETS & CHINA 12

MSCI Emerging Markets index (local currency terms) 12

China Shanghai Composite index 12

4. BOND MARKETS 13

SOVEREIGN BOND YIELDS 13

US 10-year Treasury yield 13

Germany 10-year government bond yield 13

CREDIT SPREADS 14

US Investment Grade Credit spread & US HY Credit spread 14

EU Investment Grade Credit spread 14

EU High Yield Credit spread 15

5. COMMODiTIES 15

Crude oil (WTI Spot) 15

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6. PRECIOUS METALS 16

Gold 16

Silver 16

7. FX 17

EUR/USD 17

GBP/USD 17

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Executive summary

> The broad European Stoxx 600 index seems on the verge of a long-term bullish breakout.

> A further rally above 3,100 would be a strong bullish signal for the S&P 500 index. Based on the

recently finished ascending triangle pattern, we can calculate a price target of - at least - 3,300 in

subsequent months and quarters.

> In the short-term though, the big up movements have left the S&P 500 rather overextended which

may set the stage for a sideways consolidation or a possible pullback towards initial support near

2,950 first. A decline below the latter level suggest a further weakening towards at least 2,730. What

could argue for the latter scenario is the huge complacency as expressed by indicators related to the

Volatility index ‘VIX’.

> Both the DAX 30 and Nikkei 225 indices are very stretched in the near-term as we have barely seen

any retracements in the past month. A such, we think the short-term upward potential seems fairly

limited. We could well see a sideways consolidation or a possible pullback first to digest these strong

gains. Still, the medium-term trend direction is upwards so there will likely be more bullish follow up

in the months ahead.

> Regarding the Swiss market index (SMI 20), we believe there is a reasonable chance of a bullish trend

continuation that could target 11,800, on balance over the coming months and quarters.

> The short-term picture in the US 10-year Treasury bond yield is neutral as long as support- and

resistance zones at respectively 1.35% and 1.95% stay intact.

> The short-term technical outlook in the German 10-year government bond yield has improved.

However, until we see a rise above the significant resistance zone near -0,2%, both the long- and

medium-term trend continue to be downwards.

> We consider the medium-term picture as neutral as long as the large sideways consolidation phase

- where crude oil is trading between support near $50 and resistance at around $66 - stays intact.

> Both gold and silver are likely to remain in a larger consolidation phase for longer, digesting the

strong gains over the past several quarters.




Market to Watch highlight

Europe Stoxx 600 index

This very broad European index (with small, mid, and large-cap equities from the EMU countries, Sweden,

Switzerland, and the UK) seems to be on the eve of a breakout above the very significant resistance zone

just above 400. This area contains the price peaks from 2000, 2007, 2015 and 2018 (see graph). From a

long-term perspective, we would consider a significant surpassing of the 2015 all-time high around 415

as a bullish breakout confirmation.

As the index has never been trading higher, there sits no technical resistance above. A minimum

theoretical price target formula in such case is to take the vertical distance of the high-low range (of 2019)

and to add this bandwidth to the breakout price (the 'pendulum swing' method). This yields a target price

of nearly 500, which may ultimately be expected in subsequent quarters. Technical indicators look

healthy and seem to support a further up move. For example, various market breadth indicators - such

as the rising number of stocks trading above their 200-day moving average or rising to new 52-week

highs - indicate that the rally is broadly supported, which suggests underlying strength (see graph).

Notwithstanding the mentioned bullish indications, prices should rise to above the 415 level before the

breakout can be considered as valid. Another filter that can be applied for more confirmation is ‘time’

(the breakout must be sustained on a monthly closing basis). None of these conditions have been fulfilled

yet. Finally, a decline below the August low near 360 would negate this bullish long-term bullish bias and

signals a further weakening instead towards long-term support near 325.




Stock Markets

US

S&P 500 index and other US indices

Early last week, the US benchmark index climbed above the large sideways price range of the past 20+

months towards new all-time highs. A bullish breakout from this lengthy continuation pattern now seems

in progress, that - once validated - targets significantly higher levels in the coming months and quarters

(see the left hand graph). It will point to a continuation of the dominant trend - that is the uptrend since

the March 2009 low. In concrete terms, we will regard this as a structural upward breakout once the

index rises above 3,100. At the same time, an ascending triangle pattern was finished (see the right hand

graph). Based on this pattern of the past quarters alone, we can calculate a bullish price target of - at

least - 3,300 in subsequent months and quarters (see the right hand graph).

Other market signals could add to this (tentative) bullish outlook. For example, the improvements in

various key market breadth indicators indicate that the breadth of the advance in the S&P 500 has

widened rather than narrowed recently (see graph).




Equally positive is that secondary US indices that were lagging behind at an earlier stage, such as the

Russell 2000 (small caps) and and Dow Jones Transportations index recently hit fresh 52-week highs. The

same applies for the important ‘Financials’ sector (and banks in particular). It has been one of the

strongest S&P 500 sectors lately and hit multi-year highs this week. Strength in the financial sector is

generally seen as a bullish sign because this sector is often regarded as leading indicator for the entire

stock market. Regarding the technology-driven Nasdaq 100, it has shown renewed relative strength

(outperformance) in the past months and also hit new all-time highs this week (see graph). A continuation

of the rally in the S&P 500 would require both financials and ‘tech’ to strengthen further. Together, these

sectors have a weighting of more than 35% in the S&P 500. Another encouraging factor is the breakout

to new all-time highs in the ‘SOX’ (Philadelphia Semiconductor index), as semiconductors are a leading

industry group within ‘tech’ (see the Market to Watch highlight in the previous technical trend outlook

report). All these aforementioned shifts point to a stronger appetite for risk, which is positive for the

stock market overall.




However, we are taking a neutral stance at best regarding the short-term technical outlook as the big up

movements in the past weeks have left the S&P 500 rather overextended. It is trading two standard

deviations above its 50-day moving average (see graph). This may well set the stage for a sideways

consolidation or a possible pullback first, to digest its strong gains. In the latter case, the area in the S&P

500 index around 2,950 should be a strong support floor.

If the index would stage a deeper correction, this would clearly weaken the bullish outlook and the whole

upmove of the past weeks could proof to be a classic false breakout. In that case, investors should reckon

with a high possibility of a weakening in time towards a key support zone near 2,730 (the lower end of

the aforementioned ascending triangle pattern).

An argument in favour of such a bearish scenario is the excessive bullish complacency that we are seeing

right now. The Volatility index VIX has dropped to very quiet levels again and suggest a low fear of price

drops. At the same time, the term structure of the VIX index shows that the one-month VIX is currently

showing a far above average discount to the three-month VIX (VXV) and the difference between VIX and




VXV hovers at the bottom end of the historical range. This is telling a similar story of complacency. It may

suggest that at least a temporarily high point is already near. Another potential red flag is that a huge

speculative net-short position positioning in VIX futures has developed (again), that is comparable to the

positions that existed prior to several (fierce) sell-offs in the past years. The unwinding of such a crowded

short position will likely put pressure on stock prices, which may be a catalyst for a broader stock market

setback (see graph).

Europe

Euro Stoxx 50 index

This EMU based blue-chip index staged an upside breakout above the downward resistance line since

2015 and climbed to another multi-year high this week. This has brightened the medium term technical




picture and clearly speak for a further rally in the coming months on balance towards 3,800 (= the 2015

high) at minimum.

DAX 30

The rapid price rises in the German benchmark index over the past several weeks – without any form of

pullback – have created serious short-term overbought conditions. Meanwhile, the VDAX Volatility index

sits at very quiet levels, reflecting complacency among investors (see graph). As such, the index seems

vulnerable for a temporarily setback or a sideways consolidation to digest its strong gains. Provided that

the index stays at least above the 12,500 support area in case of pullbacks, the medium-term picture

looks bullish though and there is a big chance that the index will eventually extend its rise back up to the

2018 all-time highs (around 13,600).




Swiss market index (SMI 20)

Last week’s strong upmove to new all-time high has improved the medium-term technical picture

markedly. All the more so as the lengthy negative momentum divergence in recent months (which we

discussed in former reports) has disappeared due to these rises. Initial support now lies near 10,150. In

concrete terms, we believe there is a reasonable chance of a bullish trend continuation that could target

11,800, on balance over the coming months and quarters. Only a fall back below (the blue trendline)

support at 9,700 would negate this bullish bias.

UK FTSE 100

As long as the index fluctuates between the horizontal support floor surrounding 7,000 and resistance

(the July year high peak) near 7,650, the near-term outlook is neutral. We think a drop to below the former

level (finishing a small head-and-shoulders topping pattern at the same time), would be a clear indication

of another falling phase towards 6,400. Finally note that UK index is strongly underperforming its global

peers.




Japan

Nikkei 225 index

The upside potential for the Japanese stock index seem rather limited in the near term. The sharp price

rises of the past weeks point to seriously overbought conditions by now, while sentiment is too bullish.

The Daily Sentiment Index (trade-futures.com) showed an extremely high amount of bulls (91%) this

week. This could well set the stage for a setback or at least a sideways consolidation first. Provided that

the index stays at least above 22,300 in case of such a larger pullback, the medium-term picture looks

promising though. Concretely, we think there is a good chance that the index will eventually extend its

rise all the way back to the two price peaks of 2018 above 24,000 eventually. Finally, note that the

Japanese index is recently outperforming its global counterparts, after several quarters of strong

underperformance.




Emerging Markets & China

MSCI Emerging Markets index (local currency terms)

The medium-term bias seems mildly bullish. See in the graph how the EM index has broken out above

the downward resistance line since April and rose to multi-month highs. Also note that both the 50-day

and 200-day moving averages are now rising again, indicating upwards trend direction. As such, - despite

the recent overbought conditions - the index appears to be headed for a re-test of the April high near

60,000 in the weeks ahead. Once the index exceeds this resistance zone decisively, we foresee a 'retest’

of the all-time high near 66,000 in subsequent months. That is to say, an additional upside potential of

10% or more.

China Shanghai Composite index

The short-term technical outlook is neutral as long as the support zone around 2,750 and nearby

resistance near 3,050 remain intact. Once the index exceeds the last-mentioned level, the year high near




3,300 will be a direct bullish target. Later on, we could see an additional rally to 3,600 (the 2018 high) or

higher. To the contrary, a drop significantly below the aforementioned level of 2,750 would suggest

further pullbacks to the year low near 2,450.

Bond Markets

Sovereign bond yields

US 10-year Treasury yield

This is a reiteration of the call we made two weeks ago. The short-term picture is neutral as long as

support- and resistance zones - at respectively 1.35% and 1.95% - stay intact. In the bigger picture, a

downward trend, with lower highs and lower lows since Q4 is still dominant. In concrete terms, the

medium-term technical outlook remains negative as long as this resistance cluster around 1.95% is not

exceeded to a significant degree. In such case, renewed weakness seems in the cards over the coming

months. Once the 10-year yield also drops below the 1.35% price support cluster to a significant degree,

much lower levels (towards at least 1%) are in the offing. To the contrary, once the 10-year yield breaks

above aforementioned resistance, this will affirm the case of a medium term bottoming process in place,

which opens the door for a further rise to at least 2.35% eventually.

Germany 10-year government bond yield

The short-term outlook improved mid-October when the yield broke through initial resistance (which has

now become near-term support) near -0.4%. Next, the 10-year yield could well climb further to the

resistance zone surrounding -0.2% (among others the declining 200-day moving average as well as the

38.2% Fibonacci retracement level of the prior huge decline since early 2018). However, until the yield

crosses this aforementioned -0,2% level to the upside, both the long- and medium-term trend continue

to be downwards.




Credit spreads

US Investment Grade Credit spread & US HY Credit spread

Both the IG and High Yield credit spreads have now narrowed to below the slightly upward sloping (blue

dotted) trend lines. When these these support zones are breached decisively, we foresee a further

weakening over the coming months. In such case, the early 2018 lows will be a realistic downside target

in subsequent months. That is to say, the extra downside potential for the the IG and HY credit spreads

could run to respectively 40 and 70 basis points.

EU Investment Grade Credit spread

As long as a further rebound in the European IG spread does exceed short-term resistance near 1.5%,

the underlying downtrend since the peak in January remains intact and we think that a re-test of the early

2018 low at around 1.1% is the most likely scenario in the coming weeks and months.




EU High Yield Credit spread

Regarding the EU HY credit spread, we will gain more clarity about the trend direction as soon as it breaks

this years’ tightening consolidation pattern with chart support near 3.9% and resistance surrounding

4.75%.

Commodities

Crude oil (WTI Spot)

We consider the medium-term picture as neutral as long as the large sideways consolidation phase -

where crude oil is trading between support near $50 and resistance at around $66 - stays intact. Also

note that the price is hovering close to both the sideways 50-day and 200-day moving averages, which

confirms the lack of a clear trend in either direction at present (see graph above). However, once key

support near $50 breaks down to a significant degree, the technical picture suggest a further decline

back towards the December 2018 low near $42.




Precious Metals

Gold

The precious metal is currently in a consolidation (or ‘resting’) mode, digesting the strong gains over the

past several quarters. Therefore, the short-term outlook is neutral as long as the precious metal hovers

between initial support near $1,460 and year high resistance around $1,566.

The medium-term trend remains upwards though. It is a strong sign that gold has only retraced a minor

portion of the rally during the summer months until now. As such, we think there is a good chance that

gold will eventually extend its lengthy uptrend. In concrete terms, an eventual break above $1,566 will

be bullish and likely sets the stage for a further rise towards above $1,700. To the contrary, should we

see a clear break below $1,460 support, this would first trigger a larger correction-signal signal. It

suggests a re-test of the significant support cluster near $1,380 (where gold staged a bullish breakout

during last summer).

Silver

The chart pattern is rather similar to gold. As such we think silver can ultimately follow the precious metal

and steadily head for $21 in case of a rise above year high resistance near $19.7. Short-term support lies

just below $17. However, if it drops to below that level, we will most likely be seeing a further weakening

to $16. Still, we stay positive in the long-term on technical grounds as long as this latter support zone (the

bullish breakout area from last summer) holds.




FX

EUR/USD

Once the FX pair exceeds the resistance zone near 1.12 (where we find, among others, the declining 200-

day moving average as well as a downward sloping resistance line), we will likely see more bullish follow

up in subsequent weeks and months towards at least 1.141 (the previous peak formed in June). To the

contrary, a fall below short-term support around 1.10 will suggest that the rebound since early October

is already complete and indicates a resumption of the downtrend since early 2018. As soon as year low

support near 1.088 also caves in, a further downward move towards at least 1.05 is the most likely

scenario.

GBP/USD

Last month, the medium-term picture improved considerably as GBP/USD climbed above both a

downtrend resistance line as well as the falling 200-day moving average (see graph). Furthermore, it is a

signal of strength that the FX pair has merely seen a sideways consolidation in recent weeks (rather than

a pullback) to digest the fierce rally from October. In concrete terms, we think the area surrounding 1.34

will be a bullish target in subsequent months. A further rise could well be fueled by a further unwinding

of speculators' net bearish bets on Pound Sterling futures. Last month, we already saw a rapid unwinding

of this crowded short trade (see graph on the next page). In other words, extra buying pressure. Should

we see any setbacks, we will interpret such a down move as a correction within a medium-term uptrend,

as long as it finds support at (or above) 1.26.


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Disclaimer: Finally note this report is solely based on technical analysis. As such, the opinions expressed may therefore differ

or even contradict from our fundamental, macro or political analysis.

Documents

Stock market rally fireworks · 11/19/2007 · support- and resistance zones - at respectively 1.35% and 1.95% - stay intact. In the bigger picture, a downward trend, with lower