GETTING TECHNICAL
Falling BRICs Can Shake Other Emerging Markets
By MICHAEL KAHN
THERE HAS BEEN A SHIFT IN the global equity scene that seems to have gone unnoticed. While world attention was focused on places like Dubai and Greece, three of the superstars -- Brazil, India and China -- have made significant technical breakdowns.
And the fourth member of the BRIC quartet -- Russia -- is not far behind. This is not good news for all emerging markets since the BRIC countries are considered to be bellwethers for the broader emerging-market sector.
The most damaged of the group from a technical standpoint is China. The Shanghai Composite Index has made a series of lower highs and lower lows since November to fulfill the most basic definition of a declining trend.
Domestic investors will note even more damage in the iShares Trust FTSE/Xinhua China 25 Index Fund (ticker: FXI). This exchange-traded fund has completed a technical pattern called a rounded top (see Chart 1).
Chart 1
A rounded, or saucer top is a difficult pattern to trade since it does not offer a clear, objective level at which all can agree it breaks down. But as with art and pornography, we know it when we see it. The trend makes a gradual rollover from up to down until it becomes clear that the market is heading the other way.
The ETF shows other, more traditional signals that things are not so good. For starters, it is one of a handful of country ETFs that has moved below its 200-day moving average -- a key benchmark for institutional investors. It also sports multiple support breaks, rising volume on the decline and bearish momentum conditions. In other words, it fulfills many technical requirements for a market in retreat.
The iShares MSCI Brazil Index Fund (EWZ) also has a rather weak looking chart (see Chart 2). While still above its 200-day average, the break of its bull-market trendline from March is quite clear.
Chart 2
Here, too, we see volume and momentum indicators supporting the bearish case.
For more advanced chart watchers, there is also an arguable head-and-shoulders pattern in play. This formation is defined by a failure to rally to new highs while the market moves mostly sideways, but that is not why it is worth mentioning. The value in adding this pattern to the analysis is that it is possible to use it to forecast a likely downside target.
By measuring the height of the central peak, or head, in the pattern and projecting it down from the break point, we get a first objective. For the Brazil ETF, that would be roughly 62, or 6% down from current trading. The total decline from the December peak near 80 would be more than 22%. That is a sizable correction in anyone's book.
Finally, the iPath MSCI India Total Return Index ETN (INP) shows a modest set of bearish technicals (see Chart 3). While technically still in a bullish trend from its March low, this market dipped under a shorter-term trendline drawn from the July low. It also sports the same problems with volume and momentum as its BRIC cousins.
Chart 3
Taken together, the technical breakdowns in these leading markets bode poorly for the rest of the emerging markets across the globe. Indeed, the iShares MSCI Emerging Markets Index Fund (EEM) suffered a false resistance breakout last month and a trendline breakdown this month (see Chart 4).
Chart 4
For investors, it is yet another sign that money is moving away from assets considered to be risky and toward assets considered to be safer. The mood of the market has indeed changed to one of caution.
Michael Kahn, mutual fund co-manager, author of three books on technical analysis, former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, also blogs at www.quicktakespro.com/blog.
Copyright 2009 Dow Jones & Company, Inc. All Rights Reserved
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