[Chart Of The Week] What Latin America Is Suggesting For The Next Move In Crude Oil

September 23, 2016

One of the benefits of it being 2016 is that global markets are more interrelated than ever before. We can take price data from the other side of the world and use it to take advantage of domestic markets in the United States as well as many other countries and asset classes. To purposely ignore what is taking place in markets around the world seems irresponsible at this point.

Today we are watching what Latin American stocks are suggesting for the next direction in Crude Oil prices:

[hide_from visible_to="public"]

To view the Chart of the Week and commentary, create a free account below:

Already a free member? Sign in here

[checkout_form product_id="56" account_box_heading="Sign Up Here for Free" nonmember_text_free="Create Free Account" already_purchased_text="You've already signed up for a free membership!" account_box_heading=""]

[/hide_from]

[hide_from visible_to="member"]Today we are looking at a ratio of Latin America vs Emerging Markets, specifically using the iShares Latin America 40 Index ETF $ILF and the iShares MSCI Emerging Markets ETF $EEM. As you can see in this chart, the price of this ratio really started it's collapse towards the end of 2014, at the same time that Crude Oil broke down below key support where the selling accelerated:

Click On Charts To Zoom In

Updates on this chart can be found here for Members

In January, the ratio between Latin America and Emerging Markets put in its bottom, while Crude Oil didn't bottom until February. This bullish divergence was a signal that things were changing. Moving forward we are looking for a breakout in the Latin America vs Emerging Markets ratio to signal the next leg higher in Crude Oil.

This makes perfect sense as we see exposure to energy out of Latin America, more so than we do from other Emerging Markets. There is also a certain element of risk appetite (or lack thereof) that can be seem simultaneously between this ratio and crude oil prices. It looks like some further sideways consolidation is necessary here in both of these price charts before another leg higher. The weight of the evidence is suggesting a more neutral approach here for now, within the context of what looks to be a longer-term uptrend for both.

More recently, I built an equal-weight index of countries with direct energy exposure around the world. The All Star Charts International Oil Countries Index moves very closely with the price of Crude Oil. It is an equally-weighted index with 25% Brazilian Bovespa, 25% Russian MICEX, 25% Australian S&PASX and 25% Canada's TSX. Here is a quick sample of what this index looks like: