In a recent strategy note UBS technical analysts laid out three possible second half scenarios. Which one are you betting on?
Scenario 1 = Trading range between 1,010-1,040 and 1,131-1,150Probability = 40% (increases to 50+% on failed breakout)
This Neutral call is the street consensus view. Investors lack the conviction to commit aggressively to marketplace (i.e., either net long or net short) creating a choppy trading range market. Increases to 50+% on repeated attempts to breakout above 1,131-1,150.Scenario 2 = Correction resumes leading to a marginal new low (950)Probability = 30% (increases to 40% on confirmed breakdown)
This defensive call is based primarily on the fear of tail risk. Bearish camp points to the unresolved sovereign debt problem in Greece, repeat of May 6th flash crash, China slowdown, double dip recession, and geopolitical events around the world. Probability increases to 40% on confirmed breakdown below key support at 1,010-1,140.Scenario 3 = Market melts-up to marginal new highs (1,220-1,250)Probability =30% (increases to 40% on breakout & falls to 20% on breakdown)
This is the contrarian view on the Street. Breakout above key supply at1,131-1,150 increases the probability to40% as sideline money and shorts are forced back into marketplace. This breakout also negates a large 10-month head/shoulders top, confirms a 4-month head/shoulders bottom, and validates the July 1st low of1,010.91 as a Mid-term Election Year bottom.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.