Still a Contrary Market?

10/08/2013 10:15 am EST

Focus: GLOBAL

Thomas Aspray

, Professional Trader & Analyst

Emerging markets have rebounded from the summer’s sharp sell-off, and MoneyShow’s Tom Aspray investigates whether this welcome reversal of fortune has legs.

Monday’s trading broke a pattern as the stock market’s rebound from the very weak opening fizzled late in the day and the market closed near the day’s lows. The market internals were very weak with four times more declining issues than advancing ones.

The daily technical studies have deteriorated further and resumed their short-term downtrend. This makes a drop to stronger support more likely as the daily starc- band on the Spyder Trust (SPY) is now at $165.30 with the monthly projected pivot support at $163.27. A close back above $169.34 would be short-term positive.

I expect the debt ceiling to be raised before the deadline, and that seems to be the prevailing opinion on Wall Street, as well, which does make me bit nervous. It is not that those interviewed in the mainstream media are always wrong but I am more comfortable when their views and mine are not the same.

Last month, the sentiment on the emerging markets seemed to have reached bearish extremes, and it looked as though this might be a contrary play for 2014. Now that many of the emerging market ETFs have rallied from the August lows, does that mean the worst of the selling is over?

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Chart Analysis: The weekly chart of the Vanguard FTSE Emerging Markets ETF (VWO) shows that it has rallied nicely from the late August low at $37.19.

  • This was just above the June low at $36.68, which now becomes more important support.

  • VWO is now back to first support, line b, in the $40 area.

  • This corresponds to the quarterly pivot at $40.12 with monthly pivot support at $38.32.

  • The weekly starc- band is at $37.93.

  • The weekly downtrend in the relative performance, line c, was broken in early September.

  • The RS line is holding above its WMA but does not yet show a strong uptrend.

  • The weekly OBV is also holding above its WMA but is still below the long-term downtrend, line d.

  • The daily OBV (not shown) dropped below its WMA on September 23.

  • There is initial resistance now at $41.80-$42.

The Market Vectors Vietnam ETF (VNM) was up over 34% in the first seven weeks of the year peaking at $23.59 and forming a weekly doji. An LCD sell signal was triggered the following week.

  • VNM hit a low of $17 in late August and has rallied back to the 38.2% Fibonacci retracement resistance at $18.76.

  • The 50% resistance level is at $19.31 with the July high at $19.39.

  • The 20-day EMA, now at $18.20, did hold last week with the monthly pivot at $17.81.

  • The daily relative performance has broken its downtrend, line f, and has turned up sharply in the past week.

  • The weekly RS line (not shown) is now slightly above its WMA.

  • The on-balance volume (OBV) is just testing its downtrend, line g, and is just barely above its WMA.

  • The quarterly pivot is at $18.33 with further support in the $17.50-$17.70 area.

NEXT PAGE: A Vulnerable ETF

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The iShares MSCI Brazil ETF (EWZ) did rally above the 50% retracement resistance last month as it hit a high of $49.94.

  • The 61.8% Fibonacci retracement resistance is at $51.32 with the downtrend, line a, at $52.76.

  • EWZ made its high for the year in the first week of 2013 at $57.39.

  • The relative performance is above its WMA and has just tested its long-term downtrend, line d.

  • The weekly RS line (not shown) is above its WMA.

  • The daily OBV failed to surpass the July highs last month and is now below its WMA.

  • The monthly and quarterly pivots are at $46.80 and $46.33 respectively.

  • The 50% retracement support is at $45.46 along with chart support, line b.

  • The 61.8% Fibonacci retracement support is at $44.40.

What it Means: The technical action suggests that most of the weak long positions were shaken out of the market during the May-June decline. The failure of the weekly studies to complete major bottom formations keeps me from becoming too aggressive on the long side.

I still favor the previously recommended dollar cost averaging strategy in the Vanguard FTSE Emerging Markets ETF (VWO) as discussed below.

The Market Vectors Vietnam ETF (VNM) looks the best on a pullback while the iShares MSCI Brazil ETF (EWZ) still looks vulnerable to a further correction before a bottom is complete. It does look stronger that the Market Vectors Brazil Small-Cap (BRF).

New recommendation: For the Market Vectors Vietnam ETF (VNM), go 50% long at $18.32 and 50% at $17.94, with a stop at $17.99 (risk of approx. 4.1%).

Portfolio Update: On August 23, I recommended the following strategy, “For Vanguard FTSE Emerging Markets ETF (VWO), I would divide the amount you want to invest, say 5% of your portfolio, and then divide it into six equal parts. The first should be invested on September 3 and then invest another equal portion every three weeks. This will make you fully invested before the end of the year.”

Therefore, 1/6th was invested on September 3 at $37.94 and another position at $41.23 on 9/24. Another position should be added on 10/15 and then on 11/5, 11/26, and then 12/24.

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