As regular readers know, I always advocate looking at both daily and weekly charts because the weekly charts often give a much different perspective. This can be especially true when it comes to observing reverse H&S bottom formations on the daily charts.
The weekly chart of the iShares S&P Latin America 40 Index Fund (ILF) shows that the on-balance volume completed a top formation in June, as it formed a negative divergence, line c, that was confirmed by the break of support (line d).
The formation on the weekly chart, lines a and b, shows what appears to be a flag formation, which is typically a continuation pattern or an interruption in the overall trend. If this formation were completed, it would project a drop below the August lows.
At this time, this is still a valid interpretation, but the action of the on-balance volume does allow for a more bullish interpretation. The OBV shows a nice uptrend from the lows and has moved well above its rising weighted moving average (WMA).
An examination of the daily chart shows a potential reverse H&S bottom formation with the neckline (line e) currently at $46.
The LS low in August was at $40.43, and after bouncing to a high of $47.92 at the start of September, ILF made a sharply lower low in October at $36.73. On October 28, the rebound in ILF peaked at $47.05 and then dropped to a low of $39.92, forming a potential right shoulder (RS?).
The daily OBV pattern also supports the case for a reverse H&S bottom. The downtrend from the April highs, line f, was broken at the end of October. The OBV shows a clear pattern of higher highs with support at line g.
Because of the sloping neckline (line e), the October high at $47.05 is also a significant level of resistance. On a decisive close above $46, the upside target for the reverse H&S bottom formation would be at $56.70. But from the weekly chart, it should also be noted that the major 61.8% Fibonacci retracement resistance level is at $48.27.
Because this is a rather volatile ETF, I would look to buy at $46.12 only after two consecutive daily closes above $46.50 or better and use an initial stop at $41.44. On a move above $48.10, raise the stop to $45.86 and sell half the position at $51.60 or better.
Several other emerging market ETFs including the iShares FTSE China 25 Index Fund (FXI) and the iShares MSCI Hong Kong Index Fund (EWH) also show potential reverse H&S bottom formations that have not yet been completed (see “3 Asian ETFs to Watch”).