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Weekly Technical Market Outlook 12/23/13

Posted on December 23, 2013 by Andrew Thrasher, CMT

So we got the Taper. Many traders believe that’s the only sentence we would need in evaluating the market right now. All that’s apparently mattered has been the Fed and they have finally begun to ease off the gas pedal. Many expected, myself included, that equities would sell-off on the news of the Fed tapering their bond buying program. This acts as a great example of when the consensus is this strong, the market moves the other way. In this case we saw equities head higher. With that, lets dig into this week’s Technical Market Outlook.

Equity Trend

The S&P 500 ($SPX) continues to look good with the up trend still intact. We hit a new 52-week high on Friday with traders reacting favorably to the Fed’s taper announcement. The major indices (Russell 2000, Dow Jones Industrial, Dow Jones Transport, Nasdaq, S&P 500, and EAFE) all finished the week above their short-term (20-day), intermediate (50-day), and long-term (200-day) moving averages.

Emerging Markets

While the above mentioned indices look favorable, emerging markets have been struggling. Below is a weekly chart of the iShares MSCI Emerging Market ETF ($EEM). I last discussed this chart in October and mentioned the levels of resistance that emerging market bulls needed to break. Since then we have tested both resistance levels, both of which failed. $EEM is now back at its 200-week moving average with Friday’s close resting a few cents under the level of support. The previous low was at $40 and we’ll see if trading this week takes us back to this level and if buyers are able to step back in to stop the bleeding.

Equity Breadth

In a previous Weekly Technical Market Outlook I noted I was watching the 60% level for the percentage of stocks above their 200-day moving average (bottom panel of the chart). Last week we saw a test and slight break of 60%, however we closed the week back above and finished at 63.7%.

In both breadth metrics, the Advance-Decline line and the percentage of stocks above their 200-MA, a short-term divergence is taking place as the equity market hits new highs and breadth has been unable to confirm. I’ve put a red dotted line to show the divergences on the chart below. I’m more concerned with what’s taking place in the Advance-Decline line since it’s helped confirm the up trend for the better part of 2013 while the % above 200-MA has diverged since May. If we see the S&P 500 ($SPX) continue to rise this week then I’ll be watching to see if the advance-decline line can at least takeout its November high to show some level of positive equity participation.

Momentum

It seems the theme for the last several months has been for the equity market to hit a new high and momentum to diverge. This theme continued to play out last week as well. We saw the S&P hit a new high and the Relative Strength Index (RSI) make another lower high. Divergences are also taking place in our two other momentum indicators – MACD and Money Flow Index.

S&P 500 60-Minute

Wednesday’s Fed taper announcement pushed the equity market above our short-term resistance level. While price action was strong, the MACD histogram (bottom panel of the chart) began to make lower highs as it diverged from price. Although this is slightly concerning on the short-term chart, we did see confirmation in RSI (top panel of the chart) as traders pushed the momentum indicator above 70 – showing a strong sign of bullishness. If the divergence in the MACD histogram does in fact win out I’ll be watching the previous resistance level of 1810 and see if it can hold up as potential support.

Last Week’s Sector Performance

Industrials moved into the top spot last week as traders continued the ‘risk on’ rally. Materials also put in a good week after being the second strongest sector two weeks ago. Utilities continued to lag.

Year-to-Date Sector Performance

No change to YTD sector leadership last week, consumer discretionary (cyclicals), health care, and industrials continue to lead the pack. While utilities, materials, and technology are still the weakest performers for 2013.

Sentiment

My friend Ryan Detrick, who I mentioned last week on the blog as well, is the Senior Technical Strategist at Schaeffer’s Investment Research and put up an interesting chart of short interest on his Tumbr page. The folks at Schaeffer’s spend a lot of time looking through a contrarian lens when doing their analysis of the stock market. Signs of large short interest is viewed positively since this is essentially built-in buyers for a market or individual stock. Last week Ryan discussed two charts of Total Short Interest, one of those charts is below (the other was for QQQ and can be found here). What’s surprising is the fact that while the S&P has been rising, so has the level of short interest. Ryan notes that normally we don’t see short interest this high except at market bottoms – not new 52-week highs! As the chart shows, the two previous times we saw short interest this high was at the 2011 and 2012 S&P 500 lows. Ryan makes the argument that the potential short-squeeze could provide the fuel to send equity prices higher.

Major Events This Week

Not a lot of news coming out this week and it’s to be expected that volume will be relatively low as traders take time off for the Christmas holiday.

Monday: Chicago Fed National Activity
Tuesday: Durable Goods Orders and New Home Sales
Wednesday: Christmas (U.S. markets closed)
Thursday: Jobless Claims
Friday: None

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Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

China Tests Support While Under Performing Emerging Markets

Posted on October 17, 2013 by Andrew Thrasher, CMT

Like emerging markets ($EEM) in general, China has had a nice last four months. Below we have a chart of the iShares China ETF ($FXI). For the last four months the relative performance for China compared to the S&P 500 has been fairly strong, albeit recently. However we must dig deeper to determine if China is the strongest chicken in the coup.

Using a top down process I’ll determine which is better, domestic or international? Over the last few months it’s been international. Next up should we be looking for developed markets or emerging markets? Since Mid-August emerging markets have been the place to be. Now which emerging market? Should we look at China, Brazil, Indonesia, South Africa, etc.? We can perform simple relative performance analysis to see that Brazil ($EWZ) has been one of the strongest emerging markets over the last few months. Meanwhile, China has actually been under performing the iShares Emerging Market ETF ($EEM) as we can see in the bottom panel of the chart. That’s a small piece of the process I”ll go through when looking for plays based on global regions. Taking a broad theme and going step by step deeper to see where the strength is coming from. From there I’ll use other methods of analysis to determine if the risk/reward is truly there.

Turning the focus to the latest price action within $FXI we can see it’s currently testing its rising trend line off the June low. Like all trend line breaks (if we do eventually see a break), I like to see confirmation in order to diminish the opportunity for a false move. With the advance in global equities today, China may see some benefit of hide tide raising all boats and the trend line holds. But I’ll continue to keep my eye on this one if we see future weakness in the coming days.

Checking In On Emerging Markets

Posted on October 14, 2013 by Andrew Thrasher, CMT

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

Will EAFE Continue to Outpace Emerging Markets?

Posted on August 7, 2013 by Andrew Thrasher, CMT

As I mentioned yesterday in my piece for TraderPlanet, the place to not be in 2013 has been nearly anything international. However there is still some interesting setups taking place in the foreign equity markets. Today I want to look at the relationship between the iShares MSCI EAFE ETF ($EFA) and the iShares MSCE Emerging Market ETF ($EEM). I often use relative performance charts to get a glimpse at where strength is within the interwoven cotton that is our global financial markets.

The chart below clearly shows a relative outperformance of $EFA against its emerging markets counterpart. In September and December of last year we had some resistance form but saw a breakout in late January with EAFE taking the reigns and rarely looking back. In June and July we saw two touches of 1.575 as resistance but it appears we are breaking above that now with EAFE’s continued outperformance.

The 50-day moving average has provided a nice level of support. Going back over the last six years, the ratio has stuck to the 50MA fairly closely – both on the upside and down. It seems when the ratio between $EFA and $EEM had gotten too far from its moving average (like it has here recently) we have seen some type of mean reversion, but the distance from the MA has varied, making the analysis of possible mean reversion much more difficult.

Turning our attention to the Relative Strength Index, we can see solid support has been found at the 50 level over the last few months. This has kept the ratio in a bullish momentum range during the current uptrend. However, as the ratio breaks to a new high we don’t seem to be getting the same reaction in the RSI indicator. While still in a bullish range as I mentioned, it’s not breaking above 70 to show the force of buyers to get an ‘overbought’ reading.

Going forward, as long as 50 continues to act as support for the RSI, we will still have bullish momentum as $EFA outpaces $EEM. If we see some form of weakness and we do in up having mean reversion back to the moving average, I’ll be watching to see if the 50-day continues to hold up as support.

Emerging Markets Approach Support

Posted on March 14, 2013 by Andrew Thrasher, CMT

While we have been watching the U.S. equity markets tick higher, the emerging markets don’t seem to be fairing as well. Today we are taking a look at the iShares MSCI Emerging Market ETF ($EEM). Since the start of the year $EEM has been hitting lower lows and underperforming U.S. large caps. The same price action can be seen in China ($FXI), which has also been weakening over the last couple of months. The iShares Emerging Market ETF has just over 17% of its allocation in China stocks, giving this Asian market a strong influence in the ETF’s price action.

The below chart shows the trading pattern being created in $EEM with price approaching support, presently at $42.50. It appears the test of support will likely be more of a function of ‘when’ rather than ‘if’ as the U.S. dollar continues to rise, applying pressure to foreign markets due to their negative correlation.

To gain interest in emerging markets traders will likely be looking for some degree of outperformance against U.S. equities. In the bottom panel of the chart we can see the relative performance of $EEM and $SPY, when the line is falling it tells us that $SPY is outperforming (rising more or falling less) than $EEM. The green dotted trend line, which outlines the down trend in relative performance, likely needs to be broken for any meaningful advance to take place in $EEM.

As long as we have a strong dollar and see weakness out of China, it will be very difficult for emerging markets to gain their footing. This is a great example of using outside markets to gain understanding of why a security like $EEM is performing the way it is.