Thursday, November 15, 2012

Emerging Markets: Another Credit Crises Coming?

As mentioned in the last post, Head and Shoulders topping pattern is a classic trend change signal. Its importance and credibility increases manifolds when the pattern lasts over a longer period of time i.e. more than a year. We saw similar behavior in US market top of 2007 and Market top of 2000. We are seeing a similar situation in the emerging markets right now. In order to analyze the emerging markets, EEM (the Emerging Markets ETF) was used. This ETF holds (Holdings) numerous emerging market companies, and therefore, it is a very good representation of the emerging market economy.

Head & Shoulder Top
Chart-1 shows the huge Head and Shoulders pattern in the EEM chart. It rangers from 2010 to 2012. Although it is not complete yet, it is a very bad omen for the future of emerging markets.

Chart-1 (2005 - 2012)

Chart-2 shows a dramatic picture of a Heand and Shoulders within a larger Head and Shoulders. In other words, market has been carving out another H&S since 2011 bottom. It is even more interesting when we analyze this chart along with the US  stock markets because the US stock market made a new high in Sept 2012 after bottoming in Oct 2011, while EEM has been making a series of lower highs.

Chart -2 (2010 - 2012)

These are very ominous developments and yesterday's -1.5% decline, adds to the crdibility of this potential scenario.

If this pattern is completed, we can see a very sharp decline in the markets. Based on the smaller head and shoulders completion, the target price comes out to be around 29 which is almost 30% lower than current levels.
On the other hand, if the big H&S pattern is completed, it will project around 22 which is almost 50% lower than current levels. In short, both cases suggest that we are in for a huge decline, if these patterns are completed. This development in the emerging market charts has significant implication for the global economy.
Chart - 4

Fundamental Reasoning
Emerging markets are primarily exporting nations. There economic growth is dependednt on exporting goods to developed countries like Europe and United States. Their own consumers are not wealthy enough to buy their own goods at an exoensive rate. A friend of mine told me that although most of the clothes sold in Macy's are made in Bangladesh, the locals will never buy these clothes for $20+ in Bangladesh. In other words, developed countries are the fuel behind the Emerging Markets growth. With developed countries having trouble in financing their own debt, with europe on austerity road and US going in that direction, there are very few avenues left for emerging markets to get this fuel from.

Emerging markets are a global proxy of global credit markets. They are similar to Small Businesses (Russell 2000) being most sensitive to US credit markets. If there is an economic issue which could result in credit tightning in the US, small businesses suffer the most because they find it harder to get their loans approaved. This restriction then results in closure of businesses, which is visible through the Russell 2000 stock index performance. As we all know that stock market discounts the future, the stock market tends to decline even before the actual crises is visible to everyone in the public.

In this regard, the H&S formation in the Emerging Markets is not only bad for the EEM (ETF), it means that there is some systemic problem in the global economy and some thing big is brewing under the surface. Markets are discounting something very severe, ranging from sovereign defaults to international war (trade or military).

Detailed Reprt
There are also many other implications of the Emerging Markets stock performance on the future global economic outlook. And apart from the Head and Shoulder formation, there are many other reaosns to be worried about the EEM chart. At the same time, there will be a lot of opportunities that will come out of this scenario. UST will be publishing a detailed report on this topic by the end of December. It will include the following topics:

1- Proprietary Resistance / Support Matrix for EEM
2- Elliott Wave Analysis of the future direction of Emerging Markets
3- Conditional Levels for confirmation
4- Volume Analysis
5- Global implications and how to play this potential event

This report will be sent out free to all who are on the e-mail list. To sign-up for the free report, just fill the following form:

Please note that multiple similar report will be publsihed for subscribers. These reports will address:
  1. Copper: Is the chart showing an economic cliff?
  2. Global Stock Market Index: When will we get out of the 1.5 year bear market?
  3. Gold: New highs in store?
  4. Housing Market: Recovery Complete? Get ready for the next leg down?


  1. Thanks Naqvi. I'll keep an eye on my Emerging markets investment. Maybe i'll wait for the counter rally of this downtrend and sell my EEM


  2. If you are short, be careful. Of the market is the last day of the IPM model. We can see a sharp rally from today,s bottom.

    Stop levels are well defined.


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