October 3rd, 2010

EEM: Expanding Triangle or Consolidation?

At the beginning of April, as the US stock markets were touching new post-crash highs, I wrote in a piece about foreign markets entitled “Some Opportunities Overseas“:

“stock markets around the world have been gaining ground. If you’re leery about the US markets, take a look at how constructive foreign stock markets have been recently. In short, foreign stocks, especially those in emerging markets, have convincingly broken out of a six-month consolidation (leading US markets) and are now forging ahead.”

Immediately after that appeared, the European debt crisis hit when S&P downgraded Greek debt and fears of sovereign debt risks caused investors to stop buying financial securities of any kind in Europe and the Euro plummeted raising thoughts of parity with the $US and talk of breakup and dissolution of the common currency.

Those fears seem to have now abated as the Euro has rebounded. China seems to have checked its inflation fears and Brazil is booming. World markets didn’t crash but instead extended their consolidations. The chart of EEM (Emerging Market etf) now looks like an expanding triangle (click on image to enlarge):

The pattern is quite rare but when it does appear, it usually signals a top reversal. One commentator described it as follows: “The expanding (widening) triangle becomes formed when prices behavior makes a sequence of ascending maximums and descending minimums. This pattern indicates that the market is “getting the state of hysterical instability”. “Bears” and ”bulls” are panicking. Their combat is getting “too hot” for the ascending trend continuation. So to say, the expanding triangle “kills” the ascending trend.”

I want to believe that the EEM will break out on the upside driven by upward movement of the underlying securities. Perhaps it’s only my eyes and if you peer closely enough you can actually make out a pair of horizontal trendlines (marked as dashed-blue) which would recast the 12-month pattern as a nice long consolidation out of which the EEM has already broken on the upside.

I wish charting sounded more precise and certain but it often does boil down to nothing more than perception. Some of the underlying stocks look like they’re making some really strong upside moves. Here are the current top 10 holdings by market value for stocks available here as ADRs:

  • PBR (PetroBras – 2.90%)
  • VALE (Vale – 2.69)
  • CHL (China Mobile – 1.87%)
  • ITUB (Banco Itau Holding – 1.54%)
  • TSM (Taiwan Semi – 1.50%)
  • HBD (HDFC Bank – 1.43)
  • BBD (Banco Bradesco – 1.39%)
  • INFY (Infosys – 1.33%)
  • PKX (Posco – 1.10%)
  • IBN (ICICI Bank – .99%)

If you want to do your own research, click here for a spreadsheet list.

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  • Anonymous

    Not sure if you heard about DeMark Indicator & how that apply to EEM?

  • Joe

    Sorry, not familiar with it.

  • Anonymous

    Joe,,sure wish you would put out a buy or sell on a certain ETF each month..stocks,bonds,pms,reits,countries,,etc..please advise..

  • Joe

    Better than a recommendation, Subscribers to my Alert and Recap service see what stocks and ETFs I have actually bought in my personal account. They even see even when if and when I sell any of those stocks …. something most newsletters and services don't do.