Emerging stock markets bulls at inflection point

iShares MSCI Emerging Markets (EEM) – Losing upside momentum at key resistance

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Key Levels (1 to 3 months)

Pivot (key resistance): 46.10

Supports: 43.35, 42.20 & 40.10

Next resistance: 50.18 (major)

Directional Bias (1 to 3 months)

The share price of EEM has rallied by close to 10% in the month of Dec 2019 to print a high of 45.78 on 02 Jan 2020 reinforced by the de-escalation of trade tension between U.S. and China via the impending agreement of the official Phase One trade deal sign-off on 15 Jan 2020. From its 14 Aug 2019 swing low of 38.72, the EEM has recorded a return of 18%

From a macro environment perspective, the rosy picture has started to turn “greyish” with rising geopolitical risk in the Middle East that has triggered a spike in oil prices. Almost half of major emerging market economies are net oil importers such as India, China, South Africa, thus a runaway rise in oil prices can have adverse effects on these countries’ sovereign balance sheets which in turn lower economic growth prospects.

Bearish bias below 46.10 key medium-term pivotal resistance and a break below 43.35 is likely to reinforce a further potential slide to target the next supports at 42.20 and 40.10 next within a long-term secular “Symmetrical Triangle” range configuration in place since Oct 2007.

On the other hand, a clearance with a daily close above 46.10 invalidates the bearish scenario for a rally towards the major resistance at 50.18 (Fibonacci expansion cluster & upper boundary of the “Symmetrical Triangle”).

Key elements

• The recent rally of the EEM has reached an inflection level of 46.10 which is defined by a medium-term ascending range configuration in place since 29 Oct 2018, the congestion area of 09 Feb/06 June 2018 and a Fibonacci retracement/expansion cluster.
• Price action has formed a weekly bearish “Shooting Star” candlestick pattern coupled with a bearish divergence signal seen in the daily RSI oscillator at its oversold region. These observations suggest that medium-term upside momentum has stated to wane and the risk of a bearish reversal in price action increases at this juncture.
• The 40.10 significant medium-term support is defined by the 76.4% Fibonacci retracement of the recent up move from 14 Aug 2019 low to 02 Jan 2020 high and the lower boundary of the ascending range configuration.

Charts are from eSignal