The recent rally in emerging markets may be coming to an end, said one leading technical analyst.
In the two months following its August lows, the ETF tracking the MSCI Emerging Markets index (trading under symbol EEM) soared more than 15%.
“That relief rally has reflected improved momentum and improved relative strength behind emerging markets largely driven by strength in commodity prices,” explained Katie Stockton, chief technical strategist at BTIG.
However, she sees EEM’s gains being limited by a former support level around $38 per share. The EEM closed at $XX.XX on Friday.
“Emerging markets are hardly in the clear here,” said Stockton. “They face a lot of resistance and they're somewhat overbought coming into this resistance level so we're looking for a pullback in EEM and most emerging markets.”
To support her contention that emerging markets will face some headwinds, she graphed the momentum and relative strength of several country ETFs versus the S&P 500 (^GSPC) over the course of 8 days.
Based on Stockton’s chart, Russian (RSX) and Turkish (TUR) stocks are weakening relative to the U.S. while Indian (INDA), South Korean (EWY), Mexican (EWW), and Brazilian (EWZ) shares are outright lagging.
“These markets have taken a turn for the worse on a relative basis versus the S&P 500,” she said. “I would revisit them in a couple of weeks to see if oversold conditions have returned, and if we can again see a nice push to the upside in terms of momentum and the resumption of the relative strength that they had a couple of weeks ago.”
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