Last week we were focused on Emerging Markets falling to fresh 10-year lows relative to the S&P500. We are now hitting levels not seen since 2004 when you compare the MSCI Emerging Markets Index ETF $EEM with the S&P500 ETF $SPY. We know it’s a disaster, not a secret. But today I want to take a look at emerging markets on their own. We’ve seen this group trading in a sideways frustrating range for almost 6 years while U.S. Equities have exploded higher to all-time highs.
Here is a weekly chart of the MSCI Emerging Markets ETF $EEM breaking down below the lower of these two converging trendlines since 2009 and now testing the key support that has held for the past 5 years. The underperformance relative to the U.S. and the rest of the world, mentioned before, was warning #1. The break of the lower of the two uptrend lines was warning #2. And now we are here at the most important support level we can come up with on this chart:
Bigger picture emerging markets look terrible. It’s hard for me to make an argument against that. So for a more tactical perspective, we turn to the shorter-term charts. Here are the daily candlesticks with a 200 day simple moving average, that we use mostly for trend recognition, and a 14-day relative strength index for momentum readings:
We have broken the uptrend line from the lows in December. Over the past few weeks, prices have now broken support from those December lows. Momentum is hitting oversold conditions which is a characteristic of a downtrend, and therefore confirming everything price is already signaling. Price target-wise, I’m looking at that 33 level which represents the 161.8% Fibonacci extension of that entire December-April rally.
So how do we execute? Well with that downward sloping 200 day moving average and prices breaking all kinds of support levels, I am definitely in a sell any and all strength mode, especially if we somehow get back up towards 38-39, although I doubt we get up there any time soon. I would only want to be short here tactically if we are below the December lows and more neutral above that level. Target-wise, I would be covering tactical shorts under 33, which is still a long way down from here.
This is a messy market, both short-term and long-term. The underperformance really stands out, especially with fresh support levels breaking down.
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Tags: $EEM $SPY $EWT $EWY $FXI $EWM $RSX $EWZ $EWW $ILF $EPI