Back in early February of 2020, I warned those willing to listen that “Emerging Markets Look Sick,” which was actually the title of my article.
In fact, when I posted this article in early February, I was looking for a bounce off the 42 support region in EEM, with a target back up in the 44/45 region, which was expected to be a short-able bounce. You can see this outlined in the chart I presented within that article.
As you can see, the EEM struck a low just below 42, and bounced back up to a high of 44.84. This set up the big decline of which I was warning, with an ideal target of the 1.00 extension on the chart in the 31 region.
While the EEM followed the path I outlined in both directions on my chart almost perfectly, it did overshoot my ideal target of 31 when it hit a low of 30.10. So, whereas I was expecting a 31% decline in the EEM from the February rally high I was targeting, it extended another 2% beyond my downside expectation. While we always strive for perfection, we have to realize that we are dealing with non-linear environments. Therefore, we have to always adjust based upon what the market is telling us from a probabilistic perspective.
Once the market bottomed just a bit lower than our ideal target, it began the strong rally we have experienced since the end of March 2020. So, of course, this leaves us with the question as to what we can expect from the EEM in the coming years?
At times, I will publish the analysis that I present to the members of my services in a public article. So, this is the analysis I provided to our members over this past weekend:
At this point in time, I want to provide you with the weekly chart on the EEM. As you can see, it is sporting a series of 1’s and 2’s before it potentially begins the heart of a 3rd wave rally off its wave IV low struck in 2009. Therefore, it has a lot of catching up to do with the US equity markets in order to complete this proposed structure for wave V.
In the near term, it strongly argues for a wave [2] pullback before it potentially begins wave [3] of [iii] of 3 later this year. So, this chart provides further evidence supporting my expectation for more of a pullback to be seen before the next major rally phase takes hold.
Therefore, a corrective pullback into the 36-40 region in the EEM will likely be a long-term buying opportunity. The ideal target for wave [3] is in the 60 region, which is the 1.236 extension of waves [i] and [ii], which is a common target for wave [3] of [iii], which potentially can be struck within the next 12-18 months.
I know many of you are looking at the EEM chart potential, which points us well into the 3030’s, and wondering how this works within the overall US equity market perspective that we currently maintain. But, I want to caution you that it need not necessarily follow the US equity market. We have seen many periods of time where these markets have diverged from the US equity market.
Moreover, if you attempt to align the US equity market with the projected EEM structure, it is entirely possible that waves [iv] and [v] of wave 3 coincide with the [a] and [b] waves of the a-wave of [IV] on the monthly SPX chart, whereas wave 4 of the EEM chart can coincide with the [c] wave of the a-wave of [IV], with the wave 5 of the EEM chart coinciding with the b-wave of wave [IV]. Again, they do not necessarily have to line up, but it would be reasonable to see them play out in this manner. This would suggest that, overall, the EEM can move within the same directional bias as the US equity market, but it could outperform on the upside, whereas not perform as poorly on the downside moves.
Additionally, Lynn Alden Schwartzer, one of our all-star StockWaves analysts, noted this about my EEM analysis this past week:
“Fundamentals align with technicals here.
Emerging markets were way overvalued in 2007, with higher CAPE ratios than the 2000 US dotcom bubble in some cases. Since then, they have consolidated in this choppy sideways pattern as they continued to grow, causing valuations to come down and become somewhat low by historical standards.
There's plenty of room to run in the years ahead after they get through this potentially rough intermediate-term period.”
Lastly, I would be remiss in not at least outlining the risk inherent in this potential path for EEM. Garrett Patten, who runs our World Markets service, noted that the native stock market charts which comprise the EEM are not clearly indicative of this potential, due to the overlap we have seen over the last few years, as well as due the currency influences. So, there is certainly some risk in this potential path I am outlining, and I wanted to note that here.
In summation, I think the EEM could provide us with a nice long opportunity for the next few years, that is, after we see a pullback into the 36-40 region in the coming months. As it progresses through the years, I will continue to update the larger degree picture on the EEM, and outline our Fibonacci Pinball support levels as we move through the wave degrees on the chart. Should a Fibonacci Pinball support break within this structure in the coming years, then we will have to take Garrett’s warning extremely seriously. Until that happens, I intend on following the bullish path presented on the EEM for the coming years.
Again, for those that do not understand the Fibonacci Pinball methodology of Elliott Wave analysis we utilize, I have published a 6-part series explaining our methodology some time ago for you to peruse, which will help you understand my analysis above:
https://www.elliottwavetrader.net/marketupdate/Elliott-Wave-Series-Part-1-201808184848063.html
Avi Gilburt is a widely followed Elliott Wave analyst and founder of ElliottWaveTrader.net, a live trading room featuring his analysis on the S&P 500, precious metals, oil & USD, plus a team of analysts covering a range of other markets.
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