Emerging Markets Hinting a Decline?

Introduction

Global markets have witnessed a sharp rise over the past few months. The best example in this regard is the Japanese market, which almost doubled since November 2012. However, after topping on May 23, it has declined almost 20% in less than 2 weeks. This sharp decline has captivated many in the finance industry. Decline of the Japanese market has been accompanied by a sharp decline in the Emerging Markets and the US market. Today, we will be analyzing the emerging markets to understand their implication on the global financial markets. 

Emerging Markets were one of the primary reasons why Understand, Survive and Thrive proclaimed the start of a new bull run in early December 2012. Since that time, US markets have rallied very sharply and were at over-bought levels not seen since 2007 and 2000. However, over the last 2 months, Emerging Markets did put in a lower high. This lower high was followed by a sharp decline and break of the March lows - a combination which has triggered several technical warning signals.

Head & Shoulders:

First of all, Emerging Market's ETF EEM has completed an upright Head and Shoulders patterns (shown below). This pattern suggests that there is further decline at hand. Decline in the Emerging Markets would suggest US markets are also about to undergo a sharp correction.

Key MA:

Emerging Markets ETF has broken below the key MA, used to demarcate between Bull/Bear market. This MA has been very accurate in predicting periods of sideways/down market action over the last 20 years. Break below this line is a sign of concern for the overall global financial system.

8/4 Test:

EEM has also completed an 8/4 Test to the downside on a weekly time frame. Weekly tests are very meaningful and have resulted in sharp declines in the past. Therefore, one should be vigilant of the domino effects that we might see in the global markets.

Conclusion:

Emerging Markets are showing signs of weakness and this weakness can translate into other global indices. Please note that UST IPM Model predicted a weekly Top in the current time frame. All of these things combined suggest that markets are at a critical juncture. If Emerging Markets cannot pull off an impressive rally in the next few days, we might be in for a global sell-off in June.