Morning Comment...Are Emerging Markets About to Break-out?...June 24, 2019 - BTFNow

Due to the “quadruple witch” expiration of futures and options on Friday, it’s impossible to draw any conclusions from the action in the stock market that day. So the big jump in volume on Friday meant absolutely nothing…..It’s also a pretty good guess that we won’t see a whole lot of movement in front of the big upcoming meetings (G20 and OPEC). Given the meeting between President Trump & President Xi at the one…and the impact the situation with Iran could/should have on the other…the results of those meetings should be quite important to the stock market’s next move.

This is particularly true given that the S&P and DJIA are both testing levels that have been very strong resistance. If these meetings can produce a break-out in these indexes, it’s going to be quite bullish…but if they create a situation where these indexes fail at these key levels once again, it’s going to be bearish. So there are a lot of reasons for investors to “sit back and wait” in the early days of this week.

Away from the U.S. stock market, the dollar is breaking down. As I mentioned over the weekend, the DXY dollar index has broken below its 200 day moving average late last week. This 200 DMA has been rock solid support for the greenback this year, so the fact that it has broken below this line is yellow warning flag for the dollar. It is weaker again this morning…but I also have to point out that it is getting a bit oversold on a near-term basis…and it is now testing its 200 week MA…which has also been good support for the dollar. Therefore, the dollar could/should bounce over the short-term to work-off this condition. However, if it breaks-down further once this oversold condition has been worked-off, it’s going to turn the yellow warning flag into a red one.

If the dollar does indeed break-down as we move through the summer (the way Jeff Gundlach has been saying it will this year), it should be bullish for the EEM emerging market ETF. The inverse correlation between the dollar & the EEM has been a very strong one over the years, and the chart on the EEM is beginning to show some bullish signs. Since the EEM bottomed in late May, it has seen a minor “higher-low/higher-high” sequence. If it can continue to rally over the coming weeks, it will break above its trend-line going back to the early 2018 highs…so that would be quite positive.

In fact, the most important level we’ll be watching on a longer-term basis will be $45. A break above that level would give the EEM a more major “higher-low/higher-high” sequence. THAT would be very bullish on a longer-term basis…because it would be following the “double bottom” lows from October & December of last year. In other words, we’ll have a situation where the EEM has made a “double-bottom”…and THEN broke above its key 1 year+ trend-line…and THEN made an important “higher-low” and “higher-high”. You don’t get a scenario that is more bullish than that very often…so if (repeat, IF) the EEM breaks above the 45 level as we move through the summer months, it’s going to be VERY bullish for this asset class!!!

In the weekend piece, I discussed how several different markets were at key technical junctures…including the S&P 500 index, crude oil, gold, etc. You can add the emerging markets to that list. This doesn’t mean that we’ll find out immediately which way these market will “break”. It could take a little bit of time for these “critical junctures” to work themselves out. However, it IS a situation where these “junctures” should be resolved soon…and a big move in many different markets could be quite large over the coming months. Therefore, even though we might have some boring days here and there over the summer, I don’t think that we’ll experience the traditional “dog days of summer” this year. Elevated volatility should stay with us for a while…and thus investors will want to stay nimble going forward.

Posted to The Maley Report on Jun 24, 2019 — 8:06 AM
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