DROP IN EMERGING MARKETS MAY BE SIGNALLING MARKET PULLBACK -- EAFE ISHARES ARE ALSO STALLING AT THEIR 2012 PEAK AND ARE LOSING UPSIDE MOMENTUM -- THE S&P 500 HAS COME WITHIN FIVE POINT OF ITS 2007 TOP
EMERGING MARKET ISHARES ARE SLIPPING ... While an overbought S&P 500 is nearing a test of its 2007 high, emerging markets are starting to run into potential trouble around their 2012 highs. Chart 1 shows Emerging Markets iShares (EEM) falling back below their 2012 high after moving above it earlier in the year (see horizontal line). That resistance line turned green during January when the 2012 high was exceeded. It has since turned red which is a potential warning sign (hence the yellow circle). A weaker EEM may carry a short-term warning for the SPX since both have been rising together since last June. The 60-day Correlation Coefficient (below chart) shows positive correlation between the two markets over the last year. The line has dropped sharply, however, over the last month as the two markets have diverged (the EEM dropping while the SPX has kept rising). The last time that happened was two years ago and led to a downside correction in both markets.
(click to view a live version of this chart)
Chart 1
CHINA, SOUTH KOREA, AND RUSSIA LEAD EEM DECLINE... Three of the biggest emerging market losers in the EEM are shown below. Chart 2 shows China iShares (FXI) falling back below its 2012 high and its 50 day average. Chart 3 shows South Korea iShares (EWY) forming a pattern of "lower highs" during the first quarter (see falling trendline). Chart 4 shows Market Vectors Russia ETF (RSX) falling well below its 50-day line as well.
(click to view a live version of this chart)
Chart 2
(click to view a live version of this chart)
Chart 3
(click to view a live version of this chart)
Chart 4
EAFE ISHARES MAY BE STALLING NEAR 2012 HIGH... The uptrend in foreign developed markets may also be running into some short-term trouble as well. The blue weekly bars in Chart 5 show EAFE Index iShares (EFA) right up against potential resistance at its spring 2012 high (see arrows). Any weakness from that level would create a short-term negative divergence with the S&P 500 (green line) which has continued to rise. The daily bars in Chart 6 show the EFA stalling slightly below the 60 level. More worrisome is the noticeable drop in the 14-day RSI line during the first quarter. The negative divergence between the falling RSI line and the EFA also warns of a possible short-term setback. Odds are that wouldn't be good for U.S. stocks.
(click to view a live version of this chart)
Chart 5
(click to view a live version of this chart)
Chart 6
OVERBOUGHT S&P 500 IS TESTING 2007 HIGH... The good news is that the S&P 500 is very close to challenging its 2007 high. That bad news is that it's also in an overbought condition. The weekly bars in Chart 7 show the S&P 500 closing within 5 points yesterday (1556) of its 2007 closing high (1561). Traders often take some profits around old peaks, especially if the market is overbought. The 14-week RSI line (above chart) has just moved above 70 (red circle) for the first time since early 2011 which puts the SPX in an overbought condition. That increases the odds for some short-term profit-taking. The daily bars in Chart 8 also carry a short-term warning. They show the 14-day RSI (above chart) forming a slight negative divergence from the SPX from overbought territory at 70 (down arrow). The numbered boxes on Chart 8 also show the SPX having completed a five-wave advance from its November low. A negative divergence during a fifth wave usually carries more weight, and increases the odds for some type of pullback. If one does occur, a logical support level would be the late February low (which is the bottom of the wave 4 correction). The fact that foreign shares are weakening from their 2012 highs also increases the odds for a pullback in the U.S.
(click to view a live version of this chart)
Chart 7
