Saturday, June 15, 2013

Emerging Markets's Elliott Waves

Emerging Markets have been discussed on this website for few weeks now (here and here). It seems like they have stayed down after breaking down, which could lead to further decline. Yesterday's sharp decline negated Thursday's sharp rally in the emerging markets. This suggests that downside pressure has not yet exhausted itself and that there is something fundamentally wrong with emerging economies. We have discussed several reasons and can discuss many more, but today I would like to analyze emerging markets from an Elliott Wave perspective.

Elliott Wave analysis will give us an interesting perspective about market's decline phase, and what should we expect in the upcoming weeks. Please note that Elliott Waves evolve over time, and one should be aware of potential risk scenarios to justify or negate a count. For example, market will typically decline fastest and with most ferocity during 3rd Waves and 4th wave should not enter Wave 2 area.

Looking at the current Emerging Markets (EEM) Elliott Wave count shows that markets are declining in Wave 3. Decline since mid May 2013 (IPM Model's turn date) has been relentless, persistent and powerful. All rallies have  been followed by lower lows. At the same time, market completed the 8/4 test to the downside, broke below long-term MA and completed an upright Head & Shoulders pattern. All of this happened as market was breaking down in wave 3 (shown below).

On a longer term time-scale, it appears that Emerging Markets are once again in a 3rd Wave decline (shown below) of a higher dedgree. Initial top was put in place in April 2011, which was followed by a sharp 5-6 month decline. Market then managed to rally for more than 1 year but remained below 2011 highs. Finally, in December 2012 EEM put in a wave 2 high. Since January, EEM only managed to make a lower high.

This lack of leadership from the emerging markets is worrisome, and has given way to recent sharp decline in global markets. Furthermore, above analysis suggests that emerging markets are undergoing Wave 3 of 3 decline. This phase of decline is the most powerful phase and can result in surprizes to the downside. Therefore, one should be ready for significant surprises, especially in the emerging markets.

While all of this is happening in the EEM, U.S. markets have managed to make new all-time highs. I don't know whether these new highs were a distraction tactic by the Fed/Central Banks or the U.S. economy is that much stronger than the global economy. But, one thing is clear that there is something significant brewing under the economic ocean. It might be very significant. And by the time, U.S. realizes this sea change it might be too late.

So one should be very careful in making big investment decisions in the current environment. As always, IPM Model will be used to identify long-term and short-term turn points in the global stock markets (subscription to IPM Model), along with proprietary 8/4 tests and Market Matrix model.


  1. This whipsawing action at these levels are very troublesome in that the market may be topping (remember, most market action, especially reversals, are a process). The SPX is showing a short term falling triangle in the midst of the long term rising trend. This means to me lower highs and lower lows, but the SPX can't break through the 50DMA. Bounce buyers are plentiful and supply seems to be low (people already in the market are holding their positions), so the market continues the "buy the dip" scenerio. A lot of folks thought the double test the 50DMA last week would break the SPX to the downside and there would be a steeper correction - but that didn't happen. Of course the day traders love the volatility, but those who want to go long and have a 15-18 year time frame (like myself) can't find a decent entry point they are comfortable with. Longs are dealing with seasonality, a lofty and indecisive market, and the FED and their koo koo behavior or printing money until it becomes toilet paper.

    EEM is troublesome too because China is part of EEM. Can it be that the U.S. is so strong that it can bull doze its way to prosperity by itself by printing money while the rest of the global market is going straight to Hades? I don't think so, but so far I have been proven very, very wrong. Whats next? I have no clue, but I do know that with all the indecisiveness in the market, it will probably want to continue to rise, but if you chose to go for the ride, be small and nimble. I can be small, but nimble is a problem, so I feel forced to stay on the sidelines until a "better" correction and pray that seasonality will provide it. As always, be careful out there! Brad

  2. Brad - US is kicking butt. But not this time. We are going down as of today and we may bottom between 1540 and 1590. The good news is that we will see higher highs this year! I'm not shorting the markets this time. I'm just waiting for good entry points to go long.

  3. Joesph, I was hoping the FOMC would bring me/us to a good entry point and I think your'e right. More downside will probably occur. If we break below the 50DMA and bounce back, that is one buy sign and will mark the probable bottom from this event's dip. Since picking bottoms and tops are impossible, I'm contemplating dipping in my toes in this area (assuming we close around 1600-1610). But I will bo in small. As always, be careful out there, Brad


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