Approaching resistance level
Resistance level for a security is the price point beyond which any further upward price movement is held back by an overwhelming level of supply for the security. Subsequently, the markets begin to resist moving above that level.
The emerging markets index (EEM) (VWO) (SCHE) is a gauge of price movement of emerging market securities (EEMV) (EEMO). Since the turn of 2015, emerging market securities (CEW) have largely been trending north (see chart below).
The rally picked up the pace in 2017. The rising tide has majorly benefitted:
- Country-specific investors
- Real Estate investors
- Dividend investors
Why now may be the time to exercise caution?
Though all have risen and profited from the surge, the MSCI emerging markets index (the blue line in the chart above) is gradually approaching its 2015 resistance level (marked by the red circle). Moreover, it has been trading above its 200-days simple moving average since the beginning of the year.
A quick look at a technical indicator here also shares some more perspective; the RSI.
The relative strength index or RSI measures the velocity and magnitude of directional price movements and represents the data graphically by oscillating between 0 and 100. Movements above 70 are interpreted as indicating overbought conditions; conversely, movements under 30 reflect oversold conditions. The level of 50 represents neutral market momentum.
Heading towards a July correction?
The chart above depicts the 14-day RSI of the MSCI Emerging Markets Index. Now, even after breaching the overbought level several times this year, the RSI has seen few corrections. Look back at first half of 2014 and 2016, and we see a similar trend; several small breaches followed by a march towards the oversold territory somewhere near July in both these instances.
For 2017, as we head into June. Are we nearing another July correction?