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The iShares MSCI EAFE ETF (NYSEArca: EFA) represents most of the world’s financial markets, excluding the United States and Canada. The EAFE stands for Europe, Australasia and the Far East. This global market ETF has been in a downtrend since last May and I am afraid it is signaling a bear market rather than just a correction.
If we look at the daily chart of the EFA fund, we see a clear downtrend and a pretty clean trend line that captures the series of lower highs over the last eight months. We also see that the overbought/oversold indicators are in oversold territory and it looks as though the fund wants to bounce over the near term.
Turning our attention to the weekly chart of the global market ETF, we see several other technical factors that come in to play and these are the factors that have me worried that this is more than just a correction.
We see that the fund had a double top pattern up near the $67 level with two dips down below the $57 area in between the two tops. The EFA tested this level again in the third quarter, but managed to not close a week below the low levels.
But now with the Chinese market getting crushed to start the year and most other world markets seeing selling pressure, the EFA closed at $54.93 last week and it has been down as far as $54.35 so far this week. Breaking that low suggests that the fund is in for more selling.
We might see a bounce in the near term due to oversold levels on the daily chart, but I would look at any bounce as a chance to short the EFA up near the trend line. If we step back further and look at the monthly chart, we see more evidence that the EFA is heading lower.
See how the double top happened just a little above the peak in 2007, just before the financial crisis wreaked havoc on markets worldwide? Then you see the upward sloped trend line that connects the lows from 2009 and 2012 and how the EFA has just broken below that trend line. The one possible point that could keep it from falling is the $55 area. We see that level as acted as resistance back in 2011 and now it could act as support.
Looking at all the factors on the daily, weekly and monthly charts, I see the EFA rallying over the next week or so, hitting the resistance we see on the daily and weekly charts and then heading lower again. If it breaks below the $55 level, we could see it lose another $15 down to the $40 level.
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