Emerging Markets May Be on the Cusp of a Major Breakout
Emerging markets, in the form of the iShares MSCI Emerging Markets ETF (EEM), have been underperforming the DJ World Index since 2010 -- but that may be about to change.
After all, Chart 1 shows that the RS line has crossed above a three-year down trendline and experienced a long-term KST buy signal. It's also right at the 24-month MA and could very well go through.
Chart 2 focuses on more recent data, which indicates that this relationship has recently been in a trading range and is currently right at the breakout point. A short-term KST buy signal has just been triggered, which supports the possibility of an upside relative breakout, but what of the absolute price?
It is displayed in Chart 3 along with a long-term KST. It too is at a crucial juncture, right at its secular resistance trendline. Note that the KST has been flat since late last year, but has nevertheless managed to hold at its 9-month MA. This indicates a fine technical balance with a slight bullish bias.
Chart 4 compares the EEM to a diffusion indicator, monitoring a universe of emerging market ETFs that are in a positive intermediate trend. This series has started to edge through its 2018-2025 down trendline, suggesting that its post-2020 uptrend is likely to extend. If that happens, it would also translate to a higher EEM and secular trendline breakout. At this point, though, it's important to note that the momentum breakout is tentative -- firstly, because it is not yet decisive, and secondly, this is a monthly chart, which requires July 30 data before it can be finalized.
Chart 5 shows that the price is overstretched on the upside and is sporting a bearish short-term KST. Since it is also facing the major resistance trendline indicated in Chart 4, a near-term correction, returning it to the 2024 high at $47, is a possibility. On the other hand, surprises usually occur in the direction of the main trend. Since that is currently bullish, short-term sell signals may well fail to pack much of a punch, especially as its intermediate counterpart is currently bullish.
Chart 6 also adds some additional weight to the bullish argument. It shows the close connection between emerging markets and the fortunes of commodity prices, or more specifically with copper. The overhead resistance line for the EEM is once again evident, as is a similar (but slightly shorter) one for the copper price in the middle window. The green and red arrows draw our attention to the fact that it is possible from time to time to construct trendlines for the copper price. When violated, the bullish ones are followed by a rally in both the EEM and copper. Note these setups have almost always been associated with a long-term KST buy signal for the copper price.
Fast forward to the present and we see a mega-upside breakout for the copper price, suggesting once again that it is likely to lead the EEM higher. The icing on the copper cake right now is a freshly minted long-term KST buy signal.
Latin America Could Be an Emerging Emerging Region
Chart 7 shows that the price for the iShares Latin American 40 ETF (ILF) peaked back in 2008 and has been in a secular downtrend ever since. That said, the tentative buy signal from the long-term KST in the lower window is an encouraging factor, since the equivalent indicators for most country ETFs are experiencing readings well in excess of zero and are therefore higher risk. The RS line in the third window has also been in a declining trend since 2008. It's possible that the fortunes of the ILF may be about to change due to the recent buy signal for the long-term relative KST. In any event, this ETF is well worth stalking, as a substantial rally is likely when it finally does break.
Good luck and good charting,
Martin J. Pring
The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Groupof Walnut Creek or its affiliates.
