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Wealth Management Research 5 January 2012

Trading ideasTechnical analysis of the majorasset classes

For equities, we expect limited near-term upside followed byrenewed weakness later this year. We also present a new long-term

analysis on equities and the other assets.

German 10-year Bund yields are recovering in the medium term but

still most likely to set new lows in the long run. The CRB commodity index is long-term bullish, as is gold. But the

CRB and gold are consolidating. Gold might drop to USD 1,300 this

year.

The USD index should consolidate more but we maintain ourmedium-term upside target, consistent with a bearish medium-term

view on commodities.

Global equities continued their erratic trading after our last update and

are essentially unchanged. We maintain our view that equities are likely

to continue their "upward correction" before eventually posting lows that

might undercut the 2011 lows of 4 October. We expect this to occur in

2012. The current upward correction could well be a classic "zig-zag", andour upside targets in Fig. 1 are based on this assumption. Within this zig-

zag, equity markets are possibly now in the last leg up (the "C" wave).

Therefore, risk management is important as we view upside as limited. This

limited upside should be achievable if Italian and French 10-year bond yields

ease more before moving higher in the long run. Shorter-term charts indeed

suggest this, but longer-term these yields are likely to increase, pressuring

equities.

In this update, we add a new long-term analysis of the MSCI World

equity index and other assets. For equities, we conclude that the index is

not in a bullish long-term mode yet based on the quarterly charts. The

charts even suggest that the 2003 and 2009 lows may be reached again,

although not necessarily in 2012. If so, speculation about a very large "headand shoulders" top would occur. In our view, it is unlikely that these lows

will be undercut, so the head-and-shoulders speculation is likely to remain

just that: speculation. As a result, the last decade would simply be a large

trading range, which eventually should be resolved to the upside. However,

this may take many years and the current trading range could well continue

for several years as well.

Hans Sanders, CFA, CMT, analyst, UBS [email protected]

Major equity indices at a glance

Equity Index TargetExpected

Return

MSCI World 1261 4.8%

S&P 500 1300 1.8%

DJ STOXX 600 260 4.2%

MSCI Asia ex Japan 508 8.8%

Topix 794 7.8%

Source: UBS WMR, as of 4 January 2012. Medium-term is three to sixmonths. Long-term is six months or more.

An overview of all open trading ideas, including

recommendations, can be found in the Trading

Corner at goto/wmr-tradingideas (internal).

Fig. 1: Expectations at a glance

Index Price Target Distance

Target

EquitiesMSCI World Bull 1206 1261 4.6%

S&P 500 Bull 1277 1300 1.8%

DJ STOXX 600 Bull 250 260 3.9%

EUROSTOXX 50 Bull 2375 2600 9.5%

DAX Bull 6146 6540 6.4%

FTSE 100 Bull 5698 5800 1.8%

SMI Bull 6054 6148 1.6%

MSCI Asia ex-Japan Bull 467 508 8.7%

Hang Seng Bull 18727 20180 7.8%

HSCEI Bull 10094 11134 10.3%

Kospi Bull 1866 2015 8.0%

Topix Bull 743 794 6.9%

Shanghai Comp Bull 2169 2290 5.6%

Commodities

CRB Index Bull 313 329 5.0%

Bond yields

German 2-year Bull 0.19% 0.3% 59.6%

German 10-year Bull 1.90% 2.57% 35.3%

Currencies

DXY USD Index Bull 79.7 87.0 9.2%

Bullish yields = Bearish bonds

Source: UBS WMR. Prices reflect the close of 4 January 2012. Medium-termis three to six months. Long-term is six months or more.

This report has been prepared by UBS AG. Please see important disclaimers and disclosures that begin on page 11. Past performance is no indication of future performance. The

market prices provided are closing prices on the respective principal stock exchange. This applies to all performance charts and tables in this publication.

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For commodities, the long-term chart for the CRB index has aconstructive outlook but we also expect more weakness once our initialprice objective in Fig. 1 is reached. For gold, the long-term chart is

bullish, but for the medium term we see a risk for weakness to USD1,450 or USD 1,300 in a worst case.

Turning to the near-term charts, commodities fell after our previousupdate and posted a low on 16 December, just ahead of equities. Wemaintain our shorter-term upside target of 329, focusing on a "gap"

on the weekly chart, but we need to be alert for a bearish reversal afterwhich we may reinstate our bearish 265 target.

German Bund yields are, based on the long-term charts, extremelyoversold but yields have not yet undergone any type of bottomingprocess yet. Hence, absent an upcoming bottoming process, we have

to expect lower yields still in the years to come.

10-year Bund yields have fallen since our last update and bottomednear 1.8%. We think this was just a correction, and hence leave our

higher yield target of 2.57% intact. The 2-year Bund yields did notproduce our expected bounce but slid to a low of 0.142%, an all-timelow. We did expect them to post new all-time lows eventually, but

certainly not that fast. We again expect a countertrend bounce in 2-year yields but decrease our target to 0.3%.

The DXY US dollar index is, from a long-term chart point of view, in adowntrend, and lower levels are eventually (probably beyond 2012)

likely, i.e. below the all-time lows. This is consistent with a bullish viewon commodities.

Since our last update, the DXY broke above the 80 resistance level andthen just consolidated sideways. The index is still likely to correct, toabout 77, but for the medium term it remains on track to our target of

87 in Fig.2.

We summarize our primary views in Figs. 1 and 2, which show our

targets and our support/resistance levels, respectively, for each index.

Equities

MSCI WorldSummary: After our last update, equities fell and bottomed on 19

December, which made good on our assumption that a buying

opportunity should emerge after some weakness. This erratic behavior,symptomatic of an upward correction against the previous bearmarket, should continue and be followed by a new cyclical bear marketthis year. Upside to our targets is limited and equities are short-term

overbought. But we maintain our target of 1,261. Our very long-termquarterly chart suggests that a test of the 2009 low cannot beexcluded over the long term (after 2012) because of a bearish "evening

star" pattern completed in December.

From a long-term perspective, the quarterly chart in Fig. 3a thatstarts in 1972 shows a clear uptrend that covers the secular equity bull

market that started in 1976 and lasted for more than two decades. Itended with the TMT (Telecom, Media and Technology) bubble that

burst in March 2000, after which global equities traded sideways in awide range: the 2003 low of 700 was followed by a high in October2007, which was followed by another drop to 700 in March 2009. It is

noteworthy that the 700 level corresponds exactly with the 61.8%

Fig. 2: Risk levelsSupport and resistance levels

Index Price Support/

Resistanc

Distance

Supp/Rest.

EquitiesMSCI World 1206 1132 6.5%

S&P 500 1277 1202 6.2%

DJ STOXX 600 250 232 7.9%

EUROSTOXX 50 2375 2180 9.0%

DAX 6146 5637 9.0%

FTSE 100 5698 5328 6.9%

SMI 6054 5700 6.2%

MSCI Asia ex-Japan 467 440 6.2%

Hang Seng 18727 17700 5.8%

HSCEI 10094 9600 5.2%

Kospi 1866 1750 6.6%Topix 743 704 5.5%

Shanghai Comp 2169 2134 1.7%

CommoditiesCRB Index 313 293 7.0%

Bond yieldsGerman 2-year 0.19% 0.14% 32.4%

German 10-year 1.90% 1.81% 4.7%

CurrenciesDXY USD Index 79.7 74.7 6.6%

Source: UBS WMR. Short-term is less than three months. Price reflects the closeof 4 January 2012.

Fig. 3a: MSCI World: 1972 presentQuarterly candlestick chart and MACD

Source:UBS WMR and Bloomberg, as of 4 January 2012

Fig. 3b: MSCI World: November 2000 presentWeekly candlestick chart and MACD


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Fibonacci retracement of the entire secular bull market from 1976 to

2000. Once again, this important retracement coincides with the lowsfor the corrections or bear markets in 2003 and 2009. The 2011 high

in April/May did not quite reach the 2007 high and at this point in timeit seems likely to us that the ultimate low after the 2011 high has notbeen set yet, i.e., the 4 October 2011 low is likely to be undercut in the

next sell-off. Therefore, the question is where this low will be set. If thislow would be near 700, then speculation about a huge head-and-shoulders top will almost certainly surface. We have marked the left

shoulder, head and potential right shoulder in the chart. A decisivebreak below the 700 support line would complete a very large toppingformation, implying even more downside. In our view, this could only

occur in case of a major financial (or other) catastrophe. However, a

mere "test" of 700 followed by a rebound would suggest that equitieshave been in a trading range since 1996. And since a trading range is

in principle a trend-continuation pattern, one should expect eventually

a breakout above the 2007 high (1,686). We think the latter scenarioof a trend continuation of the previous secular bull market is morelikely than the former. However, it may take a long time, i.e., several

years, before the resumption of this trend takes place. In themeantime, we note that the quarterly chart has just posted a so-calledbearish evening star configuration. This configuration spans the second

through fourth quarters of 2011. Although it means next to nothingfor the shorter term, the configuration implies a high probability ofmore downside over the longer term. Therefore, in the longer run, we

would not exclude a test of the 700 support level.

We now turn to our regular shorter- to medium-term outlook.Since our last update, the MSCI World index fell to its low on 19December and reversed upwards. This agreed with our prediction that

equities could fall due to their overbought state, which should be abuying opportunity. It was indeed. On the long-term monthly chart, wenow have three interesting candles: October was a bullish "engulfing,"

followed by a fairly large "hammer" in November and a "doji" in

December. A doji is indicative of indecision or hesitation. We stillinterpret this candle formation to be part of a bottoming formation or

at least a stabilization process. We repeat that after some more

stabilization, the risk is high that a new cyclical bear market will start asthe head-and-shoulders top that occurred this year has not been

negated. Moreover, downside in the past bear market, although

significant, does not seem sufficient yet in terms of Fibonacciretracements. On the MSCI World, the 4 October low coincided withthe 50% retracement, which could be sufficient, but on the S&P 500

this retracement has not even been achieved.

We will simply summarize the conclusion from the analysis in our

previous report: The MSCI World index seems to be "correctingupwards" since the 4 October low against the previous bear market

(May October 2011) and we assume this to be a simple zigzag or"ABC" correction. Currently, the market should be in the last wave"C", up again. The first high-probability target based on this formation

and the previous bear market is 1,262 (close to our current target of1,261), which corresponds with the 61.8% internal retracement. It alsocorresponds with the breakdown level of the head and shoulders top.

Hence, we maintain this target. The second high-probability target is

1,315. We finally note a "gap" at 1,269, 0.5% above 1,261, which islikely to be closed as well.

From a fundamental point of view, our UBS CIO office is underweight

equities.

Fig. 3c: MSCI World: Nov 2006 presentDaily candlestick chart and MACD

Source: UBS WMR and Bloomberg, as of 4 January 2012

Fig. 4a: S&P 500: May 2006 presentWeekly candlestick chart and MACD


Fig. 4b: S&P 500: July 2007 presentDaily candlestick chart and MACD


Fig. 5a: DJ STOXX 600: Sep 2006 presentWeekly candlestick chart and MACD


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S&P 500Summary: The S&P also fell immediately after our update, in line withour prediction of a short-term correction. We maintain our target of

1,300 but note the presence of very strong immediate overheadresistance. After this, we may have to reintroduce our previous 1,018target again in 2012, as we suspect that a new bear market will

develop once the "upward corrective move" is over.

Since our last update, the S&P 500 fell to its low on 19 December andthen recovered back to its original level, consistent with our hunch that

the overbought mode in our last update would trigger a correction thatwould be a buying opportunity. We now turn to monthly and quarterlycandle sticks because the fourth quarter of 2012 has just completed.

Monthly candles for November and December were both dojis,indicating indecision, after the bullish reversal candle of October. Abearish candle in January would imply further medium-term weakness.

The very long-term quarterly chart is rather constructive. This may implythat the downside we see in 2012 will take place in the first half of the

year, followed by a positive second half. In summary, we expect themarket to grind higher to our targets on page 1, followed by renewedweakness, most likely in the first half of 2012. The second half should

then be positive again. We repeat the analysis in our previous report asit is still valid: The current "upward correction" against the previousbear market is likely to run into sand around the 1,300 level. This is our

previous target, but we can now confirm it as being the 61.8%

Fibonacci extension of the 25 November low. This low would be theend of wave "B" in zigzag wave terms, similar to our analysis of the

MSCI World index. We also note that the alternative 100% Fibonacci

extension suggests a high of 1,373, but we stick with 1,300 for now.

From a fundamental point of view, our UBS CIO office is positive on US

equities relative to global equities.

DJ STOXX 600Summary: This index also fell until 19 December and then recovered itslost ground. We maintain that 260 could be reached in the currentupward correction, which most probably is a wave "C" of a zigzag, but

do not expect the index to break higher than that.

The index also sold off to the low on 19 December since our lastupdate, and then recovered its losses. We think, in line with otherindices, that the upward correction has further to go, and maintain our

potential upside to 260. However, reaching 260 would imply that the

falling 150-day moving average would have to be overcome. The 260level corresponds with the 61.8% retracement of the sell-off that

started in February, as well as with the breakdown level at 260. In

addition, assuming also here that the index is currently in wave "C" ofan "ABC" upward correction, the 100% Fibonacci extension of wave

"A" from the low of wave "B" is equal to 260, exactly our target.

From a fundamental point of view, our UBS CIO office is negative on

European equities relative to global equities.

EURO STOXX 50Summary: The index also posted a reaction low on 19 December,

followed by a mild bullish reversal. We think the recovery off the

September low will continue but it would need to break the resistanceprovided by the falling 150-day moving average. If and when our

target (2,631) is reached, renewed significant downside is likely todevelop.

Fig. 5b: DJ STOXX 600: Oct 2007 presentDaily candlestick chart and MACD


Fig. 6: EURO STOXX 50: Nov 2000 presentWeekly candlestick chart and MACD


Fig. 7: DAX: November 2000 presentWeekly candlestick chart and MACD


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The index also posted its recent low on 19 December, followed by amild recovery. The falling 150-day moving average is now ominously

close to the current price and in order to reach our target of 2,631 thishurdle would need to be overcome. We assume that the triangle typeof formation since the high on 28 October is simply a consolidation of

the rally of the end September low, which is most likely followed by acontinuation of that upward move. This is perfectly consistent with ourassumption that the move off the lows is a zig-zag.

Our target of 2,631 is based on the 61.8% Fibonacci retracement ofthe bear market at 2,641, as well as the 100% Fibonacci extension ofthe September lowOctober high projected from the November low at

2,631.

From a fundamental point of view, our UBS CIO office is negative on

European equities relative to global equities.

DAXSummary: The index sold off and recovered to levels at our last update.

Although short-term overbought, the index is likely to recover to the61.8% Fibonacci retracement of the previous bear at 6,540 (previouslywe targeted 6,600).

The index behaved in a fashion similar to the EURO STOXX 50, settinga low on 19 December, followed by a mild recovery. We think the

falling 150-day moving average resistance will be overcome eventually,and note that the weekly chart features a bullish reversal called

"piercing line" for the week ending 23 December. We maintain ourpotential upside target of 6,540, equal to the 61.8% retracement ofthe MaySeptember bear market. There we will be looking for

renewed weakness. From a relative performance point of view we notethat the DAX index has started an impressive outperformance of theEURO STOXX index already in 2003. Although we do not have a top

yet on this chart, we do expect this outperformance to end some time

in 2012.

FTSESummary: The index may well have almost reached its upside potentialwithin the upward correction since its 9 August low. It came within 1%

of our target of 5,800 on 4 January. We keep our target of 5,800 for

now but given limited upside we would protect profits.

The FTSE index also ended its correction on the 19 December low, and

subsequently traded up, exceeding the level at our last update andcoming close to our target of 5800. On 4 January it reached 5,720which is just 1% away from the target. Once at the target we would

be looking for signs of a bearish reversal to develop. Hence at thispoint we'd be inclined to protect profits rather than chase the market

higher. We repeat that the upward correction since the 9 Augustintraday low seems to unfold in a more complex fashion rather than asimple zig-zag. Applying a 100% extension of the 25 November low to

the AugustOctober advance, then we get 5,819, quite close to ourtarget.

From a fundamental point of view, our UBS CIO office is positive on UK

equities relative to global equities.

SMISummary: The index reached our target of 6,000 on 3 January, havingshown almost no weakness since our last update. We expect a bearish

reversal to develop soon, potentially after reaching 6,148 (our new

Fig. 8: FTSE: November 2000 presentWeekly candlestick chart and MACD


Fig. 9: SMI: November 2000 presentWeekly candlestick chart and MACD


Fig. 10: MSCI Asia ex-Japan: Nov 2000 presentWeekly candlestick chart and MACD


Fig. 11: Hang Seng: November 2000 presentWeekly candlestick chart and MACD


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target). Important pivot support upon a re-break below 6,000 would

be near 5,700.

The SMI reached our target of 6,000 on Tuesday 3 January. Whereasmost other indices corrected lower immediately after our last update,posting a low on 19 December, the SMI just traded sideways until that

date. Subsequently, the index took off and finally broke through the6,000 resistance level. At face value, a breakout is a positivedevelopment, but given the importance of this level we suspect that

the breakout will be followed by volatility, in a worst case a properfalse breakout. The 6,000 level is important because it correspondswith a major breakdown in July as well as the 61.8% Fibonacci

retracement of the FebruaryAugust sell-off. So we are now looking

for a potential reversal to lower levels, although almost by definitionsustained break above this strong resistance level would be bullish. We

note a fairly important "gap" on the weekly chart at 6,148, created in

mid-July. We fine-tune our target to 6,148 because a potential near-term scenario could be the closure of this gap (+2.5% from 6,000). At6,148, the index would face renewed important resistance from the

gap as well as an incoming downtrend line while being stronglyoverbought. This may generate a bearish reversal, potentially taking theindex below 6,000 again, followed by more weakness. This weakness is

likely to be contained by the important monthly pivot support near5,700.

From a fundamental point of view, our UBS CIO office is neutral onSwiss equities in a global context.

MSCI Asia ex-JapanSummary: Having moved sideways since our last update, we reduce

our upside target to 508 from our previous target of 529. The 529remains important from a Fibonacci extension and retracement point ofview but we now consider it a maximum target rather than a likely

target.

Since our last update the index is almost unchanged, posting a low on

19 December in line with the other indices, but the subsequent

recovery was weak. This probably is a result of the rather bearishlonger-term structure, with long-term moving averages pointing down

and having barely retraced enough of its previous bull market from

October 2008 to April 2011. We now reduce our shorter-term recoverytarget to 508 from 529, because due to the recent lacklusterperformance and a falling 150-day moving average, the 529 now looks

challenging. The 529 remains important however, but we would nowconsider it a maximum upside target rather than a likely target. Apartfrom it being an important Fibonacci extension, it is also the 61.8%

retracement of the AprilOctober sell-off.

Hang Seng in Hong KongSummary: Similar to the MSCI Asia ex-Japan index, we also decreaseour target for the HSI, to 20,550 from 21,600. Our previous target

remains important as a maximum upside target.

Very similar to the MSCI Asia ex-Japan index, we decrease our target,

from 21,600 to 20,550 because the index has a similar chart-structure

to the MSCI Asia ex Japan and also moved essentially sideways sinceour last update. The 50% Fibonacci retracement of the November

2010 peak to the October 2011 low gives 20,500, which is close to thegap of mid-August (already closed). We do not dismiss our previoustarget of 21,600 completely, but prefer to assess the market as and

when the index reaches our first target.

Fig. 12: HSCEI: November 2000 presentWeekly candlestick chart and MACD


Fig. 13: Kospi: November 2000 presentWeekly candlestick chart and MACD


Fig. 14: Topix: November 2000 presentWeekly candlestick chart and MACD


Fig. 15: Shanghai Composite: Nov 2000 presentWeekly candlestick chart and MACD


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From a fundamental point of view, our UBS CIO office is neutral onHong Kong equities in a global context.

HSCEI Hang Seng China EnterprisesSummary: The index moved sideways since our last update and we

maintain our upside target of 11,134. If and when the index reachesthis level, we would expect a new move down.

The index is roughly unchanged compared with our last update, andthis sideways move is in our view going to be resolved by a move up,to our target of 11,134. So far we have no reason to change this

target. It is based on the 61.8% Fibonacci extension of the October

November advance, projected off the 25 November low. This 61.8%extension coincides with the 50% Fibonacci retracement of the bear

market, and with our existing target of 11,134. It also corresponds

with a previous breakdown level. Once the target of 11,134 is reached(if the index gets there), we would expect the longer-term bearishtrend to resume again.

We repeat that a very large double top between July 2009 and August2011 was completed, with a width of roughly 3,100 points. This would

imply a minimum downside of 7,600, because the 10,700 support hasbeen broken. We need to keep this in mind in case the index resumesits downtrend again.

KOSPISummary: The Kospi also moved sideways since our last update and wemaintain our upside target of 2015, based on a Fibonacci extension. Atthis level, we expect renewed downside to develop. In that case, we

may have to target 1,562 again.

Having moved sideways since our last update, the index is now close to

its falling 150-day moving average. We assume that the sideways move

since end October is a consolidation of the end-September to end-October advance. Hence, we should expect a positive follow through,

breaking the resistance of the 150-day moving average, at least

temporarily. To estimate the upside target we use the 76.4%retracement of the advance from 26 September28 October, projected

off the November low. This coincides exactly with the 61.8%

retracement of the MaySeptember sell-off. This corresponds with ourexisting target of 2,015. In the event of a bearish reversal near 2,015we would again target 1,562, which is the 50% Fibonacci retracement

of the entire November 2008April 2011 bull market.

TOPIXSummary: After a sideways move since our last update, we maintainour target of 794, with more potential upside later. Our "Rising Sun"

basket of Japanese equities currently contains five stocks, and threehave been removed with a profit.

The index is by and large unchanged since our last update, also settinga low on 19 December followed by a recovery, and we keep our upsidetarget. In the mean time we simply note that important support is

located at 700, which is reinforced by the monthly pivot support at

701. For now we first target the gap at 794 and note that the 800resistance level is very strong. If this resistance level breaks, then the

likelihood of a further gain to 915 would be large. Our upside targetsof 800 and perhaps 915 are on a medium-term basis only because on alonger term timeframe we would expect the index to fall below the

700 support level. We repeat that on 29 November we launched a

Fig. 16a: Reuters/Jefferies CRB: Oct 1994 presentMonthly candlestick chart and MACD

Source:UBS WMR and Bloomberg, as of 4 January 2012. Solid line is the 10-month moving average.

Fig. 16b: Reuters/Jefferies CRB: June 2005 presentWeekly candlestick chart and MACD


Fig. 16c: Gold: August 1992 present

Monthly candlestick chart and MACD


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basket on Japanese equities, "The Rising Sun." The basket is

maintained in our "Trading Corner", and it now contains five stocks.We have taken profit on three stocks so far.

From a fundamental point of view, our UBS CIO office is neutral onJapanese equities in a global context.

Shanghai CompositeSummary: The index broke through the 2,300 support level, against

our expectation of a near-term bounce, and subsequently fell to below2,200. Despite a bearish medium-term structure, a near-term bounceto 2,290 is likely.

Shortly after our last update the index broke below the importantsupport area of 2,300 2,230. We had expected a bounce to 2,460

first, followed by a breakdown. But the index succumbed to strong

selling pressure just after breaking the support level by falling to 2,134,the intraday low on 28 December. At present, the index has fallen tothe 76.4% Fibonacci retracement of the October 2008 July 2009

advance and posted a doji candle last week. Although the long-termoutlook is not positive, we also think that immediate downside is verylimited now. A mild recovery to 2,290 is now likely. But that may be a

selling opportunity.

Commodities

Reuters/Jefferies CRBSummary: The index also bounced back from its 25 November low andgained some ground since our last update. We still think a gap on the

weekly chart at 329 will be closed before a new bear market sets in.Our very long term charts is rather bullish. Also, gold has a bullishlong-term outlook, but consolidation in 2012 is likely, perhaps with a

low, in a worst case, near USD 1,300.

From a long-term perspective, the monthly chart in Fig. 16a thatstarts in 1994 shows the importance of the 295 support level, and thiswould be confirmed by the quarterly chart (not shown). Not only doesit correspond with the 2006 lows, but it also equals the January 2010high. The quarterly chart shows an inverted hammer for the fourthquarter of 2011, which conditional upon a positive 1Q 2011 candlewould complete a long-term bottom. This suggests that the 295support level may hold, and be the start of a new move up. If it does

not hold we expect a drop to 265, followed by a recovery.We also added a long-term monthly chart on gold. For the long termwe think gold is likely to reach higher highs, i.e. above the Septemberhigh of USD 1,921 because the long-term trends are intact without anytopping formation. But near- and medium-term gold is likely toconsolidate, potentially reaching the USD 1,300 area in a worst casesituation. This is because the very long-term quarterly chart isoverbought and shows two so-called 'shooting star' candles for the 3 rd

and fourth quarter of 2011. This suggests at the very least a sidewaysmove, or a correction as a likely outcome in 2012. The monthly chart inFig. 16c confirms this, and if the wave from October 2008 toSeptember 2011 is over, then a minimum correction would be the38.2% Fibonacci retracement, or USD 1,450. A more normal 50%correction would equal USD 1,300. If the USD 1,300 level were indeedto be reached, it would probably occur later in the second half of2012. Given quarterly pivot supports, a drop to USD 1,400-1,500 inthe first quarter would most likely be a good short-term buyingopportunity.

Fig. 17a: German Bund yield: Sep 1990 presentQuarterly candlestick chart and MACD


Fig. 17b: German Bund yield: Nov 2000 presentWeekly candlestick chart and MACD


Fig. 18a: German Bund 2-year yield: Sep 1990 presentQuarterly candlestick chart and MACD


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We now turn to our regular CRB index shorter term analysis. Since ourlast update the index fell to its recent low on 16 December but has bynow recovered all lost ground again, and more. We can simply

maintain our upside target of 329, which corresponds with the 50%retracement of the May-October sell-off. We also maintain our viewthat after this, the index may fall to our ultimate target of 265, the61.8% Fibonacci retracement of the bull market that started inFebruary 2009.

From a fundamental point of view, our UBS CIO office is underweightcommodities.Bonds

German 10-year Bund yieldsSummary: Ten-year yields fell since our last update and have likely

reached a bottom at 1.8%. We maintain our target of 2.57%. From along-term perspective, yields are likely to move either sideways orhigher before eventually resuming their secular long-term downtrend.

From a long term perspective, the quarterly chart that runsfrom1990 is relatively easy to analyze. A long-term downtrend is wellintact, without any type of bottoming formation so far. Hence, over

the long term (years) it is likely that lower yields will be seen. The

second observation is the extreme oversold mode, as measured by thedifference between current yields and their 10-quarter moving average.

In addition, the fourth quarter of 2011 is a large doji, which suggests

that yields are likely to move either sideways or up first before that

move down again. Simply using the 61.8% Fibonacci retracement ofthe recent drop in yields indicates that 2.8% would be a maximum that

yields could reach before dropping again.

Turning to our shorter-term forecasts, we note that 10-year yields

dropped since our last update, but we think they achieved a short-termlow at the 1.8% level, the 76.4% Fibonacci retracement of the

November advance. We maintain our target of 2.57% as we believeyields could recover to the 50% retracement of the AprilSeptemberdrop.

The WMR fundamental forecast for the 10-year Bund is 2.6% on a 12-month horizon.

German Bund 2-year yields (Schatz yield)Summary: Two-year yields fell again since our last update and reached

a low of 0.144% on 30 December making a mockery out of our target

of 0.486%. We still think yields will bounce, and target 0.3%, but notethat the long-term downtrend in yields is well intact. The very long-term quarterly chart suggests that yields could well reach 0.6% beforeturning down again.

From a long term perspective, the quarterly chart that runsfrom1990 is again relatively easy to analyze. Also here a long-termdowntrend is well intact, without any type of bottoming formation sofar. Hence, over the long term (years) it is likely that lower yields will be

seen. The second observation is the extreme oversold mode, as

measured by the difference between current yields and their 10-quarter moving average, even more extreme as for the 10-year yields.

Also here, yields are likely to move either sideways or up first beforethat move down again. The 23.6% Fibonacci retracement of the latest

Fig. 18b: German Bund 2-year yield: Nov 2000 presentWeekly candlestick chart and MACD


Fig. 19a: DXY USD index: 1969 presentQuarterly candlestick chart and MACD


Fig. 19b: DXY USD: Jan 1979 presentMonthly candlestick chart and MACD


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drop in yields of 0.6% corresponds with a previous low, and in our

view this level is likely to be reached before yields drop further.

We now turn to our usual shorter-term analysis. Although we expected

new all time lows to be set in the long term, we explicitly did not

expect this to happen within a couple of weeks of our update. Hence,our target of 0.486% was decisively off the mark as yields tradedrelentlessly lower since our last update. They reached a low of 0.144%

on a closing basis on 30 December. Given the extremely 'oversold'nature of these yields, we do expect a bounce, to 0.3%, but not trendreversal.

The WMR fundamental forecast for the 2-year Bund is 1.1% on a 12-

month horizon.

CurrenciesDXY (USD trade-weighted)Summary: The index broke through the 80 resistance level since our

last update and started a consolidation. It might drop to 77. Medium-term, we maintain our target of 87. From a very long-term secularpoint of view we note that the DXY is still in a downtrend, making new

all-time lows likely in years to come.

From a long-term secular point of view, we note that the DXYquarterly chart in Fig. 19a suggests that the index is still locked in along-term downtrend and that the consolidation since end-2005 istherefore likely to be resolved to the downside, i.e., levels below 70should eventually occur. But because of the long-term nature of this

chart, it could well be years before this happens. The 38.2% Fibonacciretracement of the 3Q 2001 peak to the 1Q 2008 low has exactly beenachieved at USD 90 in 1Q 2009 The quarterly morning star reversalthat completed in 4Q 2011 suggests that a bit more upside, perhapsindeed to our target of 87, is l ikely.

Turning to our shorter-term analysis, having broken the 80 resistancelevel since our last update, we think the short-term outlook for the

index is a correction, perhaps to 77. This should then be followed by

more strength to our target of 87. In our last update we alreadyassumed a short-term correction to occur that could reach the 76.7level, but it did not yet materialize yet. This 77 level is the 61.8%

Fibonacci retracement of the recent 28 October25 November rally.The long-term monthly chart shows a bottoming formation that should

translate into our target of 87 being reached over time. This isconsistent with our medium-term bearish view on commodities.

From a fundamental point of view, our UBS CIO office is overweightthe USD.

Fig. 19c: DXY USD index: Oct 2000 presentWeekly candlestick chart and MACD


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Appendix

If you require further information on the instruments or issuers mentioned in this publication, or you require general information

on UBS Wealth Management Research including research policies and statistics regarding past recommendations, please contact

either your Client Advisor or the mailbox [email protected] giving your country of residence.

Stock selection system:

Analysts provide three equity selections (Most Preferred, Neutral View, Least Preferred).

Equity preference:

Most preferred:

Taking into consideration the stock's rating as well as other factors relevant for portfolio management (e.g. risk, diversification),

analysts expect the stock to contribute positively to the overall performance of the relevant Equity Preference List (EPL) in the next

12 months, i.e. to outperform versus the thematic benchmark.

Neutral view:

Analysts expect the stock to neither contribute positively nor negatively to the performance of the relevant EPL, i.e. to perform in

line with the thematic benchmark in the next 12 months.

Least preferred:Taking into consideration the stock's rating as well as other factors relevant for portfolio management (e.g. risk, diversification),

analysts expect the stock to contribute positively to the relevant EPL in the next 12 months, i.e. to underperform versus the thematic

benchmark, which results in a positive contribution to the EPL.

Suspended

Issuing an analyst's research on a company can be restricted due to legal, regulatory, contractual or best business practice

obligations, which are normally caused by UBS Investment Banks participation in an investment banking transaction involving the

company concerned.

Equity Selections: An assessment versus a benchmark

Equity selections are a relative assessment versus a thematic benchmark. Analysts select a benchmark for every thematic investment

context they define, be it a regional, sector or other investment context. These benchmarks are often defined as MSCI Level 1, 2

or 3. In cases where such benchmarks do not appropriately reflect the investment context, we may deem a different benchmark

more appropriate. The assigned benchmark is also used to measure the performance of the individual analyst.

Stocks can be selected for several Equity Preference Lists (EPLs). In order to keep the various preference lists consistent, a stock canonly be selected as a part of either Most Preferred lists or Least Preferred lists. As benchmarks among lists differ, stocks must not

necessarily be included on every list they could theoretically be added to.

UBS's selection methodology shows private clients how to best invest if they would like to profit from a specific investment theme.

Current UBS global rating distribution (as of last month-end)

Buy 54.95% (43.33%*) . . .

Neutral 32.89% (41.24%*) . . .

Sell 6.11% (25.71%*) . . .

Suspended 5.65% (48.45%*) . . .

Discontinued 0.41% (14.29%*) . . .

Terms and AbbreviationsTerm / Abbreviation Description / Definition Term / Abbreviation Description / Definition

A actual i.e. 2010A E expected i.e. 2011E

NV Neutral View: The stock is expected to neither

outperform nor underperform the relevant

benchmark nor significantly appreciate or

depreciate in absolute terms.

p.a. Per annum (per year)

Shares o/s Shares outstanding UP Underperform: The stock is expected to

underperform the sector benchmark

WMR UBS Wealth Management Research

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Appendix

Disclaimer

Wealth Management Research is published by Wealth Management & Swiss Bank and Wealth Management Americas, Business Divisions of UBS AG (UBS) or an affiliate

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Appendix

Disclaimer

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