Is the Fourth Time the Charm for Emerging Market Bears?

Published August 01, 2017 - 6:55 AM

Emerging markets have been on fire this year. The MSCI Emerging Markets Fund (EEM) is up more than 20% so far in 2017. And short sellers have been crushed.

The technical indicators for EEM have reached overbought levels three previous times this year. But those conditions never produced more than just a small pullback, followed by another rally to new all-time highs.

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So, emerging market bears have to be asking themselves… Is the fourth time the charm?

Take a look at this chart…

The blue circles on the chart indicate each time this year the MACD momentum indicator rolled over from an overbought condition. This action coincided with a short-term peak in the price of EEM. The stock then dipped down and tested the 50-day moving average (MA) line as support.

Support held each time. The MACD indicator dipped back to neutral… and a new rally got started.

Currently, the MACD indicator is more overbought than it’s been at any time this year, and it’s starting to roll over.

At the very minimum, EEM should decline back towards its 50-day MA at about $42. That’s a decline of about 4% from yesterday’s closing price.

But it has been quite some time since EEM has traded below its 50-day MA. It’s been a long time since we’ve seen oversold conditions on this chart. So there’s the potential for a larger move lower.

Whatever the case, though—if you’re thinking about buying into emerging markets right now, this chart setup suggests you’ll be able to get in at a lower price in the next few weeks.

Best regards and good trading,

Jeff Clark

P.S. What do you think the future holds for emerging market stocks? Send me your thoughts, along with any other questions or concerns, right here.

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