Taiwan's Base Breakout Bodes Well For Stocks

Steve Strazza
March 5, 2020

From the desk of Steve Strazza @Sstrazza

Thanks to the handful of you for playing and entertaining this week’s Mystery Chart.

My apologies if this one was a bit of a layup, but that was the point. You were all buyers and so are we. Since we're all in agreement let’s dive right in and talk about why we’re bullish on this chart but more importantly, why it matters.

This is a ratio chart of the iShares Taiwan ETF (EWT) relative to its benchmark, the Emerging Markets ETF (EEM) dating back to the early 2000s.

Click on the chart to enlarge view.

In our Mystery Chart post, we explain why we like this rounding bottom pattern and believe the bias is now to the upside. Prices are consolidating above former resistance around 0.89 after recently breaking to their highest level since 2005.

As we also mentioned in the post, we just love bases like these. The bigger, the better and more reliable. In this case, we're looking at a roughly 15-year base breakout in the making, so it's definitely one to pay attention to.

There is also a similar base breakout that recently occurred in another intermarket ratio that we'll discuss below. But first, why is this ratio of Taiwan vs Emerging Markets important in the first place?

With the S&P 500 currently whipsawing above and below our initial downside objective of 3,000 along with many other indexes, we're relying largely on intermarket analysis for clues as to whether or not equities will hold these key levels (our current position on stocks is discussed in detail in our March Playbook which members can read here).

The reason we're looking at Taiwan is that it gives us a read on the semiconductor space and semiconductors give us a read on US stocks and the economy more broadly. Relative strength out of Taiwan is usually synonymous with relative strength from semiconductors, and higher stock prices in general.

With that as our backdrop, here is a chart of the Semiconductors Index relative to the S&P 500 dating back over 20-years.

It should come as no surprise that this rounding bottom pattern and upside resolution looks almost identical to the one in Taiwan vs Emerging Markets. As long as prices are above their prior highs in the 0.52-0.54 range, this is a valid breakout and these fresh 20-year highs support our thesis that we're still in a structural bull market.

The relative strength of semiconductors has a strong relationship with the performance of stocks on an absolute basis. So if we think stocks are going to keep moving higher, we’re going to want to see these new relative highs from both semiconductors and Taiwan hold.

On the other hand, we want to watch this closely in order to see if the semiconductor ratio catches down to the S&P 500 and also makes a new low, which it has yet to do. Seeing this 20-year base breakout turn into a failed move would be a major feather in the hat for bears. But for now, the ratio is holding its ground and we're seeing confirming evidence in other intermarket ratios such as Taiwan relative to Emerging Markets.

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Allstarcharts Team

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