One of the most common sell signals used by active traders occurs when the 50-day moving average crosses below the 200-day moving average. This iconic breakdown is known by many as the death cross and is used to signal the beginning of a long-term downtrend. In the paragraphs below, we’ll take a look at several charts suggesting that the emerging markets are in the early days of a major downtrend and that lower prices could be a consistent theme over the coming weeks or months. (For a quick refresher, check out: 3 Country-Specific ETFs That Look Poised to Move Lower.)
iShares MSCI Emerging Markets ETF
Retail investors who seek exposure to emerging markets commonly turn to exchange-traded products such as the iShares MSCI Emerging Markets ETF (EEM). This fund holds positions in companies from across the emerging markets, with a slight bias toward the Asian nations such as China, Korea and Taiwan. Taking a look at the chart below, you can see that the fund has been trading within a well-defined uptrend since early 2016. The 200-day moving average and dotted trendline have provided consistent levels of support on each attempted pullback. However, the recent close below has now triggered a bearish crossover between the long-term moving averages (shown by the blue circle), which suggests that the uptrend is over and that prices are likely headed lower from here. Bullish traders may want to remain on the sidelines until major indicators start to turn bullish again. (For more, see: Moving Averages: Strategies.)
With a weighting of 11.57%, Taiwan holds the third position in terms of geographic exposure in the EEM ETF. Strong performance over the past several years has made this region one of the favorites among international investors. Taking a look at the chart of the iShares MSCI Taiwan ETF (EWT), you can see that the fund has recently broken below the support of a triangle pattern and has also triggered a bearish crossover between the 50-day and 200-day moving averages. As discussed above, this price action suggests that the bears are in control of the momentum and that prices are likely to head lower from here. (For further reading, see: Basics of Technical Analysis.)
Chile is one of the nations of the world that has the most exposure to base metals. Despite the natural hedge that the Chilean economy receives from its exposure to commodities, the chart of the iShares MSCI Chile Capped ETF (ECH) suggests that the nation is in the early days of a downtrend. As shown by the blue circle, the bearish crossover between the moving averages will likely be used by traders as a sell signal, and these traders will likely look to protect their positions by placing stop-loss orders above $50.50. Bullish traders may be wise to remain on the sidelines until the bears lose conviction and a solid base is able to form. (For more, see: Rising Dollar Is Creating Opportunity in Commodities.)
The Bottom Line
Emerging markets have been the darling of the investment community over the past several years, but the long-term sell signals are suggesting that this story could be at an end. The long-term crossovers between the 50-day and 200-day moving averages discussed above suggest that a strong move lower could be in the cards and that it could prove prudent to wait on the sidelines for indicators to turn positive again. (For more, see: 3 Country ETFs for International Investors.)
Charts courtesy of StockCharts.com. At the time of writing, Casey Murphy did not own a position in any of the securities mentioned.