Emerging Markets Are Ready To Show Some Strength
- Posted by Greg Harmon
- on June 11th, 2013
Relative Strength that is. The ratio chart of the S&P 500 SPDR, $SPY, against the iShares MSCI Emerging Market ETF, $EEM, below shows the story. During this latest run higher in the SPY, the EEM has been taking it on the chin, off over 11%. And it looks set up to continue lower still. But the ratio is another story. At the top of the rising channel, with a Relative Strength Index (RSI) that is technically overbought and a Moving Average Convergence Divergence indicator (MACD) is at new highs. You can see from the chart that the last time the ratio was in this situation it corrected sideways
for some time before a move lower. And it could do so again. Rather than playing for the SPY to fall or for the EEM to rise, why not play the pair for the correction? By selling 100 share of SPY for every 400 shares of EEM long you have a means of playing this correction. Should the ratio move outside of the channel, over 4.15 stop the trade, and look at the gaps in the chart at 3.90 and 3.6 as well as the bottom rail of the channel as places to take profits.
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Gregory W. Harmon CMT, CFA, has traded in the Securities markets since 1986. He has held senior positions including Head of Global Trading, Head of Product Development, Head of Strategy and Director of Equity. (More)
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