Over the last few months I’ve grown more interested in international plays as things have picked up on a relative basis against U.S. equities.
Today I want to focus specifically on emerging markets. Josh over at The Reformed Broker highlighted the analysis of Jonathan Krinsky who took a look at $EEM against $SPY and thinks there could still be some room to run for emerging market’s outperformance. Krinsky does excellent work and is a great follow on Twitter. I agree with Jonathan, the relationship between domestic and int’l does look favorable for overseas equities. But lets take a look at the weekly price action of $EEM.
Below is a chart of the iShares Emerging Markets ETF ($EEM) going back to mid-2010. In 2011 emerging markets put in a top and have been making lower highs ever since. The reason I’m using a weekly chart is due to the fact that it helps minimize some of the noise when looking at multi-year time frames. The picture becomes much clearer. Back in late 2010 and early 2011 we had a nice divergence between price and the Relative Strength Index after the RSI broke above 70 in November ’10. Price action also seems to respond nicely to traditional ‘overbought’ and ‘oversold’ conditions when viewed on a weekly basis. The bar is set much higher for a break of these levels and thus happen much less often. Look at the RSI during the lows in September ’11 and June ’13, isn’t that beautiful?
Okay, let’s get back to what’s been happening over the last few weeks. From the top in 2011 we can draw a trend line to connect the 2012 high and presently sits right round $43. We kissed this trend line in September, which pushed price back to its 200-week moving average, but didn’t create a lower low for 2013. Just above the falling long-term trend line we have the May high at $43.70 that could potentially give some trouble if we continue to see an advance in $EEM.
With the delay of the Fed’s taper (which would be bearish for emerging markets) pushed off to December, if not later, the risk of tightening has diminished and allowed traders to continue to enjoy the ‘risk on’ characteristics of the equity market. I’ll be watching these two levels in $EEM and see if emerging market bulls can get us to clear skies above $43.70
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