The Trader Daily

 | Mar 31, 2014 | 7:30 AM EDT  | Comments
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Stock quotes in this article:

pbr

,

bbi

,

chu

,

tkc

,

cpl

,

EEM

,

FXI

,

TUR

If you're looking for last week's big winners, you'll need to look in places you've likely not ventured in months, if not years. Names like Petroleo Brasileiro (PBR), Banco Bradesco (BBD), China Unicom (CHU), Turkcell Iletisim Hizmetleri (TKC) and CPFL Energia (CPL) all soared last week. Beaten down ETFs like the iShares MSCI Emerging Markets (EEM), iShares FTSE China 25 Index ETF (FXI) and the iShares MSCI Turkey Invest Mkt Index (TUR) all powered higher.

Notice a distinctly foreign theme?

The question is: are we witnessing a sustainable turn in the emerging markets, or simply another short-term bounce destined to peter out? To try and answer this, let's review the weekly and daily ratio charts of the EEM against the SPY

 

Weekly EEM-SPY Ratio
eSignal

 

As you can see on the weekly chart above, we have bullish divergences in both the MACD and RSI. That said, if we focus more on price and less on price based indicators, the past two weeks of gains appear to be nothing more than a blip, within a longer term trend of under-performance against the SPY. Based solely on the weekly chart, I believe it's premature to assert that the current bounce in the EEM is anything more than a simple relief rally.

 

Daily EEM-SPY Ratio
eSignal

 

Shorter-term participants would be expected to place far greater importance on the daily timeframe, and based on the daily chart above, I believe a more bullish posture is warranted. The daily chart reveals an even more dramatic divergence in the RSI, an aggressively up-sloping MACD, a broken downtrend line and a push through the declining 50-day simple moving average.

The bottom line is this: while there's no denying the short-term rotation out of the SPY and into the EEM, it's premature to assume said shift will persist. The short term participant may find value in stalking a long EEM, short SPY trade. The longer-term participant, however, would be wise to step back, and allow this theme time to establish a more dramatic and stable base. 

Shifting gears to the major U.S. indices, let's begin with a review of the weekly SPY chart. As you review the chart below, pay particular attention to both the bearish divergences that occurred in mid-2013, and the ones we're seeing today. That bottom line is that while price based indicators are telling bulls to proceed with caution, price itself has not confirmed that it's time to batten down the hatches.

 

 

As you can see on the daily charts below, we're still dealing with a situation where the SPY and DIA are in balance (sideways chop), but the QQQ and IWM are in short-term downtrends. As discussed in recent reports, I still believe a responsive approach (fading both strength and weakness) is appropriate when dealing with the SPY and DIA. While those focused on the QQQ and IWM should remain focused on selling strength through the five-day, and toward the ten-day exponential moving average.

 

Daily Chart of the Major Indices
eSignal

 

Monday's intraday SPY trading is expected to revolve around which side of 185.84 to185.94 the ETF is trading. The bottom line is that all trading above 185.94 targets 186.80 and 187.30, while everything beneath 185.84 keeps sellers pressing for a break of 185.03, and a slide back down toward 184.04 and 183.75.

 

5-Minute Volume Profile SPY
eSignal

 

Let's talk about Brazil.

Anyone that's positioned themselves for a rebound in the Brazilian stock market, at any point over the past couple years, has been absolutely crushed. Petroleo Brasileiro (PBR) has been locked in a horrendous downtrend since late 2009. Vale (VALE) hasn't seen the light of day since early 2011. And every rally in the iShares Brazil Capped ETF (EWZ) and Companhia Energetica De Minas (CIG) has been faded since 2012.

The bottom line is this: Unless one is operating on a very short timeframe, there hasn't been a good time to be long Brazilian stocks in literally years. But could that finally be changing?

With VALE being the notable under-performer, the advance since mid-March in names like PBR, EWZ and CIG has been breath taking. However, as you can see on the chart below, price has gone vertical, and the 14-period RSI on the three best performers is now undeniably overbought. In my view, longer term traders still need to give these stocks time to form more stable bases.

 

Daily Chart of Brazilian Favorites
eSignal

 

Shorter-term traders, however, have a couple options. Option number one, and without question the most risky, involves stalking the three strongest performers for signs of exhaustion or excess. In this case, one would look for these stocks to put in near term tops, and then sell them back down toward their short term exponential moving averages (5,10 and 13 EMA in blue on the chart above).

Option number two sidesteps the potentially more risky short trade, and involves sitting on one's hands until prices trades back down toward the 10 and 13 day exponential moving averages. In my view, if the current advance has further to go, any pullback toward those two fast moving averages should attract significant interest. 

Any trading or volume profile related questions can be posted in the comments section below, emailed to me at parkcityyeti@gmail.com or posted to my twitter feed @ByrneRWS

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