Emerging Markets are Rising - Time to Get in or Get out?Jan 07, 2013
Chad Karnes, CMT
Emerging markets have rallied 8% since early December, but should investors continue to buy at these levels? In the article below I show price levels that would make emerging market equity ETFs an attractive buy.
The paradox of choice can often frustrate us to a point of avoiding a decision.
This can be similar in the finance world where we have thousands of mutual funds, ETFs (NYSEARCA:SPY), and individual equity choices.
Lucky for us, we have tools such as focused and technical analysis that helps whittle down all of these choices before we have to actually make a final decision between purchase or avoidance.
Mitigating the Risk of the Cliff
On 12/19 I wrote an article on Emerging Markets (here) and the opportunity to hedge the Fiscal Cliff by moving money to the iShares MSCI Emerging Markets ETP (NYSEARCA:EEM) until the Cliff was resolved.
Since then, EEM has continued to rally providing investors a wonderful spot to capitalize on the U.S. shenanigans.
Now that the Fiscal Cliff is kicked down the road and temporarily avoided, is EEM still a buy?
Beating the Paradox of Choice
EEM’s holdings represent 18% China (NYSEARCA:FXI), 15% South Korea (NYSEARCA:EWY), 12% Brazil (NYSEARCA:EWZ), 11% Taiwan (NYSEARCA:EWT), and 8% South Africa (NYSEARCA:EZA) and are located just about as far from the Fiscal Cliff as you can get.
More positive than its overseas exposure, it looked great technically. Technical analysis is one of the tools we use to help mitigate the paradox of choice and find high probability trade setups like the EEM presented in early December.
On 12/2 in the Monthly ETF in Focus section of our Technical Forecast we alerted subscribers:
"Although EEM was in a confirmed downtrend since 2011 and may be forming a head and shoulders pattern, it recently has rallied beyond resistance (down sloping blue trendline), putting the downtrend into question. Aggressive traders can buy now (@$41.78) with the expectation of a breakout and a stop below the rising red trendline. A breakout of recent highs at $42.50 would be the conservative short term buy signal."
Is EEM Still a Good Buy?
EEM has since broken out of its resistance and now sits at $45, up 7% since our 12/2 recommended setup one month ago.
The best time to buy EEM has likely passed, but that doesn’t mean it should be completely avoided. It may offer buying opportunities on pullbacks during this uptrend; the key is finding the right entry price, and that all depends on first finding the ideal stop location.
By identifying a good location for a stop, a low risk:high reward long opportunity can be identified.
The chart below can help us spot the next good purchasing price and was provided to the ETFguide'sTechnical Forecast readers on 1/2. It was also used to help identify the original trade in early December.
For an updated chart and more high probability trade opportunities click here.
EEM has made higher lows and higher highs placing it officially in an uptrend, but price is now at a level that we feel has a higher probability of acting as resistance. Longs should be cautious here.
One key for longs is price should not fall back below its breakout price around $42, otherwise the uptrend is likely over and a new downtrend has started. $42 is a key support level and should bring in a lot of buyers. If it fails then that is bad news for the bulls.
If price falls back to $42 and finds support there, longs can be entered with stops placed just below that support level. This creates a lot lower risk entry than buying at today's levels where we feel the risk is high for a pullback.
By waiting until price pulls back, then if it resumes its uptrend, assuming a 50 cent stop would be a very small risk for a potential $3+ profit, or a > 5:1 Reward:Risk Profile.
For more on Reward:Risk Profiles see my article “How to Enjoy the Upside with Limited Downside Risk” here as well as the ETF Profit Strategy Newsletter and Technical Forecast where we utilize it regularly.
If you have fiscal cliff and debt cieling headline fatigue, there are ways to mitigate it by looking elsewhere, such as high probability trading setups including those that focus on other parts of the world.
The Jan. 2013 ETF Profit Strategy Newsletter includes a detailed analysis of various market forecasting tools, along with a short, mid, and long-term outlook for the U.S. stock market. The Technical Forecast updated a few times a week includes high probability trading opportunities, like the EEM trade, that help avoid the fiscal cliff and other noise in the marketplace.
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