Emerging Markets Funds Nears Long-Term Support

The iShares MSCI Emerging Markets Index Fund (EEM) has reached a deep support zone after a vertical decline to a four-year low and could turn higher in coming weeks, powered by China’s rapid recovery from the coronavirus outbreak. The uptick could also signal a major power shift from West to East, as the United States and Europe try to cope with a market crash and growing recession.

Life is returning to normal in China, with few new infections reported from day to day, allowing stores and factories to reopen. Finding customers for their goods will be the biggest challenge in coming months, with exports contracting due to tariffs and demand destruction throughout the western world. Local industries could bloom in this mixed environment, in line with gains made by a handful of Chinese stocks in the past few weeks.

EEM Monthly Chart (2003 – 2020)

The fund came public in the low teens in April 2003 and entered an immediate uptrend, gaining ground at a steady pace into October 2007’s all-time high at $55.83. It carved a double top at that level and broke down in September 2008, spiraling lower in a vertical decline that ended at a four-year low in the upper teens in November. The swing from high to low established a trading range that hasn’t been challenged in the past 11 years.

A rapid recovery set into motion in the second quarter of 2009, stalling just above the .786 Fibonacci sell-off retracement level near $50 in April 2011. It pulled back to the mid-$30s and bounced once again, settling into a symmetrical triangle pattern with support near $37 and resistance near $45. Those boundaries held intact into a 2015 triangle breakdown that dropped the fund to a seven-year low in the first quarter of 2016.

A strong bounce completed a round trip into the 2011 peak in January 2018 and rolled over after President Trump fired the first shot in the trade war. The fund settled back into the 2011 to 2015 trading range at year end and held that ground into a March 2019 breakdown that has gathered momentum into this morning’s four-year low. The sell-off has now reached a rising trendline going back to 2008 and the .786 Fibonacci retracement level of the 2016 into 2018 uptrend.

The monthly stochastic oscillator has just crossed into the oversold zone for the first time since July 2018 but isn’t close to a contrary buying signal. At a minimum, this placement predicts that volatility will remain high while the fund seeks out a tradable low. The trendline and Fibonacci numbers suggests that event is getting closer, but it makes no sense to jump in here, trying to catch the falling knife.

EEM Weekly Chart (2016 – 2020)

The decline accelerated when the fund broke the 2018 low, which also completed a weekly double top breakdown. The vertical trajectory has carried through the .786 retracement level at $32.90, but this type of over-shoot often happens during periods of high volatility, just before price action settles around the support zone. Even so, this is a wait-and-see scenario because we’re all swimming in uncharted waters these days.

A two- or three-week basing pattern near the support zone will also turn weekly and monthly stochastics higher, raising the odds for a bounce that is likely to fail at or below the double top breakdown at $38. Time frame becomes the most important issue at that time because longer-term players may wish to hold through the testing process, with an eye on a rally back to the 200-week exponential moving average (EMA) near $42.

The Bottom Line

The emerging market fund has reached a price zone that could support the formation of a multi-month low.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.