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Emerging Markets Poised to Break Out

David Becker
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Emerging Markets Poised to Break Out

Emerging markets might be approaching an important upside breakout, as the EEM is testing trend line resistance. The weekly bars show the Emerging Markets iShares (EEM) still testing the upper resistance line in three-year symmetrical triangle. A decisive close above that resistance line is needed to signal an important upside breakout in emerging market stocks.

India was a focus because its stock market had surged to a record high on recent electoral results. Although China is the biggest country in the EEM (17%), the second and third biggest country weightings are South Korea (15%) and Taiwan (15%). That gives them an important influence on the direction of the EEM. The monthly bars show South Korea iShares (EWY) nearing a three-year high and testing a resistance line drawn along its 2007/2011 highs. Taiwan iShares (EWT) having already exceeded its 2011 and 2007 highs. Those two strong chart patterns seem to bode well for emerging markets in general.

The S&P 500 and EAFE iShares are moving in the same direction, but not at the same pace. Since the 2009 bottom, the S&P 500 has gained 160% versus an EAFE gain of 130%. While the S&P 500 cleared its 2007 peak last year, EAFE iShares have yet to do so, and are nearing a test of that important overhead resistance barrier. That will be an important test for both. What happens to the EAFE as it approaches the test of its 2007 high will have some influence on what happens in the U.S.

chart-emerging-markets-poised-break.png

Weekly momentum on EFA I strong as the MACD (moving average convergence divergence) index generated a weekly buy signal. This occurs as the spread (the 12-week moving average minus the 26-week moving average) crosses above the 9-week moving average of the spread.

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