• Study of the Week: What Does the Death Cross Mean for Emerging Markets?

    by  • June 11, 2013 2:23 pm • Charts to Watch, Quick Hits, Study of the Week • 2 Comments

    Emerging markets are in the news today because the iShares MSCI Emerging Market ETF (EEM) is forming a bearish Death Cross.  This occurs when its 50-day moving average crosses beneath the longer-term 200-day moving average.  As the name would suggest, this should have bearish consequences.

    Two of my favorite technicians both weighed in on the EEM here and if these guys talk, it pays to listen.  I’ll talk some about the Death Cross after we look at what they had to say.

    First up, Greg Harmon noted the ratio chart of the SPY to the EEM is up near potential resistance.  In other words, the EEM could finally start to outperform the SPY after lagging for months.

    Next up, J.C. Parets looked at several charts of the EEM and determined on a relative basis (like Greg mentioned) it could be appealing, but on an absolute basis he just didn’t have a strong opinion.  There’s nothing wrong with not having a strong opinion.  Remember, you want to swing at the pitch down the middle of the plate and to J.C., it isn’t there yet.

    Here’s the chart he made regarding the ratio chart of the EEM to SPY.  Again, EEM could start to outperform SPY here.

    What about the Death Cross you ask?  Well, it sure looks bearish to me.

    The ETF started trading in mid 2003, so starting in 2004 there have been seven previous times we’ve seen a Death Cross.  The near-term results two weeks later are very bearish, down 4.08% on average and higher just once out of seven times.  Going out further though, things don’t get a lot better.  1-, 3-, and 6- months later sport negative returns across the board.  Yes, this is a very simple way to look at things, but this could definitely be a headwind for the EEM here.

    Lastly, we’ve done studies on Death Crosses before and usually they are actually bullish.  The reason being once it happens, you’ve probably had a lot of poor performance and it is time for a bounce.  Check out the SPX, as it actually does better after a Death Cross than the anytime average returns.  Now the SPX isn’t close to a Death Cross, just wanted to point this out.

     

    About

    Ryan Detrick is the Senior Technical Strategist at Schaeffer's Investment Research in Cincinnati, Ohio. He joined Schaeffer’s in 2003 and is a frequent speaker and writer on stock market and economic issues and is widely sought after by financial media for his expertise and commentary. Mr. Detrick is a common guest on CNBC, Fox Business, and Bloomberg Television and has been quoted in outlets such as The Wall Street Journal, BusinessWeek, USA Today, Reuters, the Associated Press, and others. With a decade of financial industry experience in the investment and financial services area, strengths include short-term trading with an eye toward timely technical- and sentiment-based trading opportunities, and advanced option trading strategies. Mr. Detrick received a BA in finance from Xavier University, an MBA in finance from Miami University, and has earned his Chartered Market Technician (CMT).

    http://schaefferstradingfloor.com/

    2 Responses to Study of the Week: What Does the Death Cross Mean for Emerging Markets?

    1. gregharmon
      June 11, 2013 2:29 pm at 2:29 pm

      Nice Ryan – For the record I see EEM as bearish as well in most views, but with a Harmonic Butterfly that could stall the fall just above 38.

      • Ryan Detrick, CMT
        June 12, 2013 11:26 am at 11:26 am

        Got it. Thanks, Greg.

    Leave a Reply