Technical weakness in four key global ETFs preceded, or even predicted, the current decline in the US market, making their latest price action especially crucial.
The early-April decline in the German DAX Index below the March lows was a warning to me that stronger world markets, including the US, also had the potential to violate their March lows.
Earlier this week, I was discussing relative performance (RS analysis), or what some refer to as “comparative relative strength analysis,” with veteran trader and old friend Linda Raschke. She suggested that I also look at the recent action of some key global ETFs like the iShares MSCI Brazil Index Fund (EWZ), the iShares FTSE China 25 Index Fund (FXI), the WisdomTree India Earnings Fund (EPI), and the iShares MSCI Japan Index Fund (EWJ).
Linda’s analysis of these funds last month confirmed her hypothesis that the US markets were also ready to move lower. For those looking to learn more about relative strength analysis, I think you will find this Webcast segment from Linda very informative.
Linda also shared some additional insights "When you want to trade the short side, pick the weakest. If the markets build a bit of a base and look poised for upside again, then you want to buy the relative strength leaders. If there is no confirmation from the other indexes, than the upside is not going to get very far. On this last selloff, all global indexes were making new momentum lows, so one could have traded the short side with added confidence."
These funds often lead the US market both lower and higher, and the relative performance analysis of the iShares MSCI Brazil Index Fund (EWZ) bottomed two months ahead of the US market in January 2009. Let’s look at what these funds are telling us now.
Chart Analysis: The weekly chart of the iShares MSCI Brazil Index Fund (EWZ) shows the rally from the October 2011 low at $49.25 to the high of $70.74 in early March. Through last Friday (May 18), EWZ has dropped 27.1% from its highs versus just an 8.8% decline in the Spyder Trust (SPY).
The iShares FTSE China 25 Index Fund (FXI) reached a high of $40.67 in early February and was unable to make it much higher even though the US market continued to make higher highs.