Emerging Markets ETF (EEM) moving into critical tests of support

Following up on the emerging markets review we initiated a couple of weeks ago - sure enough, EEM (the emerging markets ETF) did encounter resistance at its 200-day moving average and dropped down away from it. Initially it found support at the Bollinger Band (BB) midline and tried again for the 200-day moving average, then dropped again. It can be interepreted as a consolidation before trying again, and that's consistent with the BB's now closing toward this small range. Now the lower Bollinger Band is at 25.49 on the daily chart (below), and can provide support if EEM needs it while remaining above the still-rising 50-day moving average. The indicators, not surprisingly, look consistent with the halted momentum.

Prospects for EEM may well be consistent with the several options for the U.S. equities markets that I outlined in my post earlier this morning. The most dire would be if EEM has completed a wave 4 up that implies it's going to roll over to new lows. I haven't independently verified whether EEM has the same Elliott Wave count possibilities on the big-picture, as for U.S. equities, but the weekly chart of EEM (also below) looks similar enough to suggest it's a valid comparison. Notice on the weekly chart that the 50-week moving average (MA) recently crossed under the 200-week MA. That's typically a bearish cross with longer-term consequences. It's not uncommon when such a bearish cross occurs that price will jump up when, or shortly after, the cross-under occurs ... followed by resumption of the downtrend. If that's the case for EEM, then investors should brace for more downside to come.

Obviously, remaining above the 50-day MA will stave off such bearish possibilities, so that's a line that EEM investors should keep their eyes on. If the EEM is able to get above its 200-day MA, that will substantially improve its prospects, and provide an additional line of support. It's also evident from the indicators that EEM investors shouldn't feel complacent about getting that support.

Sizing up the options for emerging markets ETF, EEM

Thanks to one of my trading buddies for sharing some info on a huge put trade being placed onto EEM! That involved one trade of 55,000 June 25 puts, bought at $1.16, against open interest of just 20,614. This indicates new positions, though less than the 20-day average overall volume but triple the average for June strikes. It also places the June expiration put/call ratio at 47, with this one trade constituting virtually all the volume for this month. Sure - it's possible this can be one very large hedge against a large long position, and therefore not necessarily a bearish signal for this exchange-traded fund. It would calculate to 1-1 protection on approximately $152 million as measured by the price of the EEM shares. Let's take a look at what the charts may be saying.

First, the daily chart shows EEM nudging up to the 200-day moving average - a classic resistance level. If surmounted then it can become support, but the first assumption must be to expect turbulence at best, and a barrier at worst that could tumble EEM to re-test its November 2008 or March 2009 lows. Volumes have been better on recent up days than recent down days, but looking at the weekly chart, the volumes have been declining as the rally has continued, so rally fuel may be dwindling. On the bigger picture, monthly chart, I can count five waves up and - so far - three waves down. The monthly chart pattern can be interpreted as a trap door to go long after a capitulation low, although better volumes on the rise would be more encouraging - and on this chart pattern, it's imperative that EEM remain above the March 2009 $20 low.

All in all, it looks reasonable for anyone with a substantial long position to put on a substantial hedge, certainly into the 200-day moving average. If it does drop, then the 20-day and 50-day moving averages should be logical levels to look for support. $25 is about in the middle of where those averages stand today - which may have played into the put buyer's strike choice. If it turns out that the Elliott Wave places EEM in a large 4th wave upward correction, and the next move is a 5th wave down (just speculation right now!), then put buyers will reap additional rewards. A good reason to keep an eye on the $20 level too.