What To Do With Those Emerging Markets? Short ‘Em

• Posted by Greg Harmon
• on January 24th, 2014

Emerging Markets have been in the dumper lately. Nobody will argue with that. Yesterday though Michael Santoli from Yahoo Finance extolled that it was time to buy the dip in Emerging Markets. Well not exactly. He is actually advocating that you buy after the next dip happens. That may well work out, buying the Emerging Markets after they have fallen some more and are turning back higher. But lets face it, it is not really actionable today. That’s okay though, he is a Financial Journalist and not a trader. But as a trader myself I see a reason to play in the Emerging Markets now, from the short side. Technically speaking the Emerging Market ETF, $EEM, is in a downtrend so maybe that is not big news to you either. And with the US Markets doing well why would you even consider Emerging Markets accept for a trade. The chart below helps to explain.

It shows an AB=CD pattern in the ratio of the S&P 500 ETF, $SPY, to the Emerging Markets ETF. The AB=CD pattern can be very powerful and it shows that the ratio of the two ETF’s has 20% higher to run until it meets its target. This means that the existing relationship of a strong S&P 500 and a weak Emerging Market can persist. But it gets a bit more interesting if you are just discovering this relationship right now, today. On the AB leg you will notice that there was a pause about halfway before it continued to the top of the leg. It is about at the half way point again. Another pause could be a very beautiful entry for a trade to run higher. The Relative Strength Index (RSI, upper scale) is becoming technically overbought, like it did at the last pause and Point B, and the MACD (lower scale) continues to rise like it did on the AB leg. both reinforcing the case above for a continued move higher. So, something to do while you wait.

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