From the desk of Steve Strazza @Sstrazza
Thanks to everyone for participating in this week’s Mystery Chart. It was a bit of a layup, as most of you were bullish, recognizing the powerful failed breakdown and follow-through back above critical former support.
We would agree and like this chart for a counter-trend move right now as well. But the reason we chose it was really for informational purposes, as we are seeing continuation patterns resolve higher all over the globe right now.
The more of these patterns that resolve to the upside, the stronger the weight of the evidence builds in favor of other consolidations working themselves out higher as well. We are seeing this across all areas of Domestic and International Equity Markets, many of which we’ll highlight in this post.
The other main focus of this post is to illustrate that while we are seeing bullish resolutions across the board, they are coming in all shapes and sizes. Some of these charts still face significant overhead supply while others are near blue skies and all-time highs. Some are in long-term downtrends, others are rangebound, and a few are still in primary uptrends.
But the most compelling breakouts right now are those occurring in bearish continuation patterns. These lagging areas are bucking the trend and trapping bears, and many are even printing powerful failed breakdowns at record lows as well.
The iShares Poland ETF $EPOL was this week’s Mystery Chart and is a perfect example of just this.
We can buy weakness in EPOL as long as price remains above its key prior lows ~16 with a 1-3 month price target at 21.
We’ve been camping out in the strongest areas over the past few months as a way to take advantage of the bifurcated market environment we were in. While we’ll always bet on the winners, right now we’re seeing participation broaden as the underperformers have assumed a new leadership position in the near term.
As such, there are currently favorable mean-reversion opportunities in even the most beaten-down areas. Poland is one of them.
The weakest region in our universe of International ETFs has been Latin America $ILF. Check out this failed breakdown at record lows.
We wrote a post about Latin America about a month ago as price was consolidating in a bearish pennant beneath key former support. Typically, continuation patterns resolve in the direction of the underlying trend, which was the bet we were making.
Instead of resolving lower, this perennial laggard recently broke higher and reclaimed its prior lows, sending a strong bullish message and providing us with a well-defined level to trade a mean-reversion move against.
The bias is now higher in ILF over the short and intermediate-term. We can buy weakness back towards the breakout level near 20 and define our risk there with a 3-6 month target at the 2018-2019 lows near 29.
Here is one of the laggards from the Latin American region, iShares Chile $ECH. The ETF has been in a primary downtrend for the past decade, recently making fresh all-time lows.
While prices were able to reclaim their prior all-time lows from 2008 and resolve higher from their recent consolidation, Chile still faces significant overhead supply at its 2015-16 & 2019 lows. This former support is likely to become resistance, making for an unfavorable risk/reward scenario right now.
While maybe not the best trading opportunity, this still provides us valuable information as seeing the weakest areas around the globe make new short-term highs and break out from bearish patterns can only be a good thing for risk-appetite in Equity Markets.
We’re not just seeing these types of resolutions and failed breakdowns in isolated parts of Europe and Latin America. We’re seeing this is in Developed European Markets, Emerging Markets, all across Asia, and of course, the US.
Here is a chart of the iShares Philippines ETF $EPHE.
Prices shook to fresh all-time lows before whipsawing higher and then consolidating for about two months until just recently blasting higher once again. Yet, similar to Chile, the Philippines is in a long-term downtrend and running into significant overhead supply.
After rallying nearly 20% in a little over a week, prices are approaching former support and a logical level for sellers to emerge at key prior lows ~29. We want to be on the sidelines for now as the meat of this counter-trend rally already occurred and prices are likely to take some time to digest their recent gains.
Like I mentioned above, not all of these recent breakouts were created equal. Some of the stronger areas around the globe are also resolving higher from continuation patterns, but with one major difference… price is in an uptrend and near all-time highs, not lows.
Taiwan $EWT, likely due to its Semiconductor-heavy economy, experienced a milder drawdown and stronger rebound off the lows relative to other countries. Just prior to the selloff, Taiwan had eclipsed its Tech-Bubble and early 2018 highs around 39, resolving higher from a two-decade base!
After a swift recovery from the Q1 collapse, prices are already back to those key former highs. We love betting on secular leaders like these with well-defined risk levels. With that said, like the Philippines, price just rallied swiftly into a logical area of supply so we want to see how buyers and sellers work things out here before taking action.
Here is a zoomed-out view, showing the monster base in Taiwan dating back to 2000.
If and when prices do make a sustained move back above 39, EWT should have a good deal of upside and we’ll have plenty of time to profit from it. As they say, the bigger the base, the higher in space… and this one has nothing but empty space overhead after 20-years of sideways action.
Here is another leader coming into the Q1 crash which has emerged as an outperformer once again. Take a look at this daily line chart of Switzerland $EWL.
Switzerland never violated its late 2018 lows and rebounded aggressively into an ascending triangle. It recently resolved from this coil like a slingshot back above its key prior highs. This resumption in leadership is incredibly constructive for global equities, but there is little to do here for now besides trade the current range, which price is currently smack in the middle of.
Similar to Taiwan, if and when we get that strength above all-time highs and our current price objective at the 161.8% extension, this is an area we’ll be looking to on the long side.
One last thing worth noting is that US Dollar weakness has created a tailwind and is responsible for some of the recent strength from these International ETFs. With that said, we are still seeing improvements in Global Equity Markets on a local currency basis, just not at the same pace in many cases.
The bottom line is that weak global breadth had been a major cause of concern for us in recent months, but the weight of the evidence has spoken in the past week or so as more and more International stock markets resolve higher.
As long as risk is well-defined with an asymmetric reward, we’re finally comfortable taking a shot on some of these counter-trend setups in areas that have underperformed over longer timeframes.
Would you rather be betting on continued outperformance from leaders like Taiwan, or counter-trend rallies in areas like Latin America? How about a bit of both?
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Thanks for reading and please let us know if you have any questions!