Unloved Emerging ETF Shocks the Street

05/20/2011 1:00 pm EST

Focus: ETFS

Thomas Aspray

, Professional Trader & Analyst

We continue our review of emerging market ETFs with a technical look at two country-specific funds that are performing well but aren’t heavily favored by investors or the Street.

See also “Emerging Markets Face Key Test

Wall Street strategists are now becoming more positive on China, as six of ten institutions are recommending an overweight position. This is in sharp contrast to their views on Chile, which has been out of favor all year.

The experts on the Street have missed an opportunity, however, as one Chile-specific ETF is up more than 18% since the March lows.

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The iShares MSCI Chile Investable Market Index Fund (ECH) has held up quite well this year, and even the recent rate hike to quell inflation has not yet impacted the price of ECH. Chile’s economy seems to be doing well, with the International Monetary Fund (IMF) looking for 5.9% growth this year.

  • ECH has just reached the weekly downtrend from last year’s highs (line a) and a weekly close above $78.50 should signal a move to the all-time highs at $80.38
  • The weekly OBV is testing its downtrend (line b) and is just barely above its weighted moving average. An upside breakout would be quite positive
  • The daily OBV does suggest we could see a deeper pullback over the near term before the uptrend can resumes.
  • There is initial support now at $75.25 with stronger support in the $72 area.

The iShares MSCI Thailand Market Index Fund (THD) completed a daily triangle formation in late March and reached the 127.2% retracement target just below $72 with the April 20 high at $72.26. The upside targets from the triangle formation were in the $75-$76 area.

  • The sharp pullback in early May took THD back to the short-term 38.2% support at $66.40 with the 50% support at $64.60 area
  • The weekly uptrend, line d, is now in the $62.40 area
  • Weekly OBV is above its weighted moving average, but it shows a pattern of lower highs, line e. This is potentially negative unless the OBV can surpass its recent high. The long-term uptrend in the OBV (line f) is still intact
  • The daily OBV (not shown) did confirm the recent highs
  • A daily close above the recent swing highs at $70.23 is needed to signal a test of the highs, with the weekly chart resistance, line c, in the $73-$74 area.

What It Means: I have been closely following the action in the emerging markets, and my volume analysis for several of the emerging market ETFs suggests that the action throughout the next week or two will be critical. The improved technical outlook for the US stock market should be supportive for the emerging markets as well.

The technical action of ECH looks the best to me currently, and as I advised earlier, I find the action in iShares MSCI Emerging Markets Index Fund (EEM) to be the most concerning.

How to Profit: Investors could buy ECH on a pullback to $75.40 or better with a stop at $71.92 (risk of approx. 4.6%).

Portfolio Update

A brief review and update on previous positions in these emerging market ETFs:

iShares MSCI Chile Investable Market Index Fund (ECH): Buyers should be 50% long at $72.04. The original stop at $67.48 was raised to $69.73 on the move above $77.05.

iShares MSCI Thailand Market Index Fund (THD): Our buy zone was not hit and there is no new recommendation for now.

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