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Looking at the results of my nightly scans last evening, I couldn’t help but notice that an inordinate number of exchange-traded funds appeared on the bullish list. Most of them either represented a foreign market or a particular global region.
One in particular caught my attention, but it wasn’t the bullish signal on the daily chart that made me sit up and take notice of the iShares MSCI EAFE Index Fund (NYSEArca: EFA). EAFE stands for Europe, Australasia and Far East. Essentially the index represents most of the developed markets outside the United States and Canada.
Looking at the daily chart of the EFA fund, the first few things I noticed were the bullish crossover of the daily stochastic readings and the fact that the fund was dancing around its 50-day moving average.
As you can from the red circles on the daily chart, the 50-day moving average has been important for this global ETF, as it acted as resistance last September and December and then it acted as support in March.
With the stock dancing around the moving average once again and the bullish crossover from the stochastic readings, how can I possibly be seeing a potential correction? Easily, because the weekly chart has a couple of items that got my attention as well.
Approximately one year ago, the EFA was hovering up around the $68 level and both the 10-week RSI and the weekly stochastic readings were up in overbought territory. The stochastic readings made a bearish crossover, the RSI moved out of overbought territory and the fund fell from the $68 area down to the $58 area by October. The chart is setting up almost identically this year.
The EFA is made up of foreign stocks mostly in Europe and Asia, and those markets aren’t so hot this year. Thus, the EFA has outperformed the S&P 500 by a wide margin, 10.36% to 3.56%, so far in 2015.
However, the European markets as well as the Asian markets have been the beneficiaries of accommodative central banks and stimulus packages that will end or taper off by the end of the year. With the market being so forward-looking, investors won’t wait until the stimulus packages end before they start selling; they will move before then.
With that in mind, I look for the bearish signs from the weekly chart to outweigh the bullish signal from the daily chart. I can see the EFA repeating what it did last year with another decline in the 10% to 15% range.
Should the fund break below the $58 level, the next layer of support is down in the $52 to $53 range. I would place a stop-loss on the short just above the $70 level. That gives it a little room above the previous level so you don’t get stopped out on a false breakout.
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