Emerging markets have made substantial progress in recent months but could be headed into a fourth-quarter tumble that brings the 2016 lows back into play. The decline would have major implications for the U.S. bull market because the sell-off would coincide with lower prices in China, India and other BRIC nations that engage in trade with the United States and Europe.
iShares MSCI Emerging Market ETF (EEM) offers a highly liquid way to play the decline, tracking a market-cap weighted index. However, an unusually high expense ratio of .69% cancels out the fund’s tight spreads, making rival Vanguard Emerging Markets ETF (VWO) an economic alternative. That fund posts lower daily volume than EEM but carries an equally tight spread with a much lower expense ratio of .15%.
iShares MSCI Emerging Market ETF came to life at $11.29 in 2003 (post two splits) and entered an immediate uptrend that reached an all-time high at $55.83 in the fourth quarter of 2007. It sold off with other world markets during the 2008 economic collapse, plunging within seven points of the 2002 low in November 2008. The subsequent recovery lifted price into the .786 Fibonacci selloff retracement level in 2011, at the same time China and commodity uptrends were topping out.
It sold off into the end of 2011, giving up half of the post bear-market gains, and then eased into a trading range with support in the upper $30s and resistance in the mid-$40s. That multiyear sideways pattern broke to the downside in August 2015, dropping the fund in two sizable waves into a six-year low at $27.61, before finding support at the .618 retracement level of the 2008 to 2011 uptrend.
It bounced sharply through the first half of 2016, lifting the monthly Stochastics oscillator into the overbought zone, but progress has stalled at new resistance generated by the 2015 range breakdown near $38 (blue line). This level has aligned tightly with the 50-month EMA and .386 retracement level, raising odds for a major reversal that could bring the deep first-quarter low back into play.
Vanguard Emerging Markets ETF entered the public exchanges at $24.26 in 2005 (post one split) and surged higher for more than two years into the November 2007 all-time high at $57.83. It then fell into a trading range with support at $42.78, holding within those boundaries into an August 2008 breakdown that dumped price through the 2005 low and into an all-time low at $18.50, just one year after the all-time high.
The subsequent recovery wave ended at the .786 Fibonacci retracement level in May 2011, just like its rival, yielding a decline that relinquished half of the prior uptrend into October. The fund held within 2011 boundaries for the next four years, finally breaking down in August 2015. A weak bounce into the fourth quarter got sold aggressively, yielding a secondary decline that landed at a six-year low in the upper 20s in January 2016.
The fund also found support at the .618 retracement level, highlighting the importance of the $30 level if it gets tested into 2017. The bounce into the second half of 2016 has now approached heavy resistance at the range breakdown, 50-month EMA and .386 retracement level, while the monthly Stochastics oscillator is flashing overbought signals. This barrage of narrowly aligned technical indicators tells observant market players to watch for a reversal that could adversely impact U.S. markets in the months ahead.
The Bottom Line
Major emerging-market funds broke down from multiyear trading ranges in 2015 and fell to deep lows at the .618 retracements of their 2009 into 2011 uptrends. Recovery waves through the first half of 2016 have now reached major resistance at the breakdown levels, raising odds for reversals that reinstate the developing downtrends.