Recent Sell-off in Emerging Markets Points to Bottom Fishing Opportunity

09/29/2017 7:00 am EST

Focus: STOCKS

Marvin Appel

President, Signalert Asset Management LLC

Recommended trade:  Buy EEM at $44 or lower and write covered calls expiring on 11/17/2017.  Choose the strike price with the most time value.  At-the-money calls should fetch at least $1.07, asserts Marvin Appel, MD, PhD, of Signalert Asset Management.


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chart

Emerging markets have sold off since September 19, with the iShares MSCI Emerging Markets Index ETF (EEM) off 3%.  The chart above shows that EEM has fallen to its lower Bollinger band. 


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The recent decline is part of an intermediate-term loss of momentum highlighted by the negative divergence between EEM and its MACD.  Specifically, although EEM made a new price peak in September, its MACD turned lower before matching its late July peak. 

In the current overall favorable market climate, the negative divergence is not a sign of a significant impending correction.  Rather, it suggests that EEM is in for a period of consolidation or limited further declines.  I recommend bottom fishing with a covered call position.

The September 26 close at $44.50, at the lower Bollinger band, is a likely support area.  The next potential support areas below that are $43, which is the area of the August 10 low, and $41.75-$42, which is area that was resistance for EEM in May and June. 

Recommended trade:  Buy EEM at $44 or lower and write covered calls expiring on 11/17/2017.  Choose the strike price with the most time value.  At current levels of option implied volatility, at-the-money calls should fetch at least $1.07.

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