Emerging Markets Fail at a Critical Level

We’ve seen an nice little rally in a lot of these emerging markets over the past few months. But let’s remember that this recent strength has come within the context of a 5 year consolidation consisting of lower highs and higher lows since 2009. I would expect that the resolution out of this pattern will lead to an explosive move. But for now, I just want to take a look at what’s happened over the last few weeks.

Here is a daily candlestick chart of the iShares MSCI Emerging Markets ETF $EEM showing prices rallying into this 18-month downtrend line. What bothers me about the recent behavior is the inability to hold above this downtrend line. After attempting to break out, prices fell last Friday back below key levels:

Click Chart to Embiggen

5-30-14 eem

While prices were failing above that broken resistance, momentum was simultaneously putting in a lower high. This bearish divergence at key resistance stands out to me, especially with this potential false move from last week.

From a tactical perspective, short sellers can use 43.30 as the line in the sand. We would not want to be short above that price. For more optimistic participants, a breakout above those levels would be really impressive. Prices would then confirm higher highs above this downtrend line and the bearish divergence would be invalidated.

I think what’s currently going on in this space is a great example of the power of the if/then. Although you constantly hearĀ in the media how there is, “too much uncertainty”, the truth is that there is never any certainty. That’s just a buzz word they like to use to get the viewers’/readers’ attention. As market participants, we know there is never any certainty at all. This is a good example in my view.

Stay tuned. This could get interesting….

Also See:

Not All Emerging Markets Are Created Equal (March 5, 2014)