Emerging markets have made a strong rally since the March low in the broad market. We could drill down into individual country funds but the iShares MSCI Emerging Markets ETF with the symbol (EEM) should work fine for our purposes. Let's look at a few charts and indicators.
In this daily Japanese candlestick chart of EEM, below, we can see that prices have started to retreat - perhaps influenced by the firming U.S. Dollar Index (DXY) this month (chart not shown). Prices are getting close to the rising 50-day moving average line and support in the $51-$50 area from December could get tested before too long.
The On-Balance-Volume (OBV) line has begun to rollover telling us that sellers of EEM have become more aggressive.
The trend-following Moving Average Convergence Divergence (MACD) oscillator has crossed to the downside generating a take profit sell signal or a sell on a stock still in an uptrend.
In this weekly Japanese candlestick chart of EEM, below, we can see a classic and effective top reversal pattern - a bearish engulfing pattern. In 25 years of using candle patterns I find this one to be one of my "go to" patterns. Prices are still above the rising 40-week moving average line but this is a lagging indicator.
The weekly OBV line has stalled out while the MACD oscillator has begun to narrow.
In this daily Point and Figure chart of EEM, below, we can see that prices reached their target in the $52 area. Prices could go higher but some sort of correction is more likely now.
Bottom line strategy: While I expect the EEM to do well in the second quarter and the rest of 2021 as I expect the longer-term trend of the U.S. dollar to be lower, the next several weeks are likely to see lower prices for this popular ETF. Avoid the long side for now.
