02 Feb 2010
Emerging markets in downward correction

Hello and welcome to CantosCharts. My name is Clive Corcoran, I'm the Founder and Publisher of tradewithform.com and I'm also an independent Consultant working with the International Capital Markets Association.

This segment is going to look at the emerging markets and I'm going to start off by looking at a chart which tracks the exchange traded fund EEM which is a very useful way to actually trade the Emerging Markets Index.

Two or three things on this chart that I would like to point to. First of all is this green cloud formation which is from an Ichimoku perspective. Very importantly, from the July low all the way up until virtually here where we are within the last few sessions, the price has managed to remain above the cloud formation at all times. Even here we came down and we tested which was also a key line of support, we bounced back up and we moved. We came up here. We broke above this Bollinger band which is this line here. We have now plunged right through the green cloud and I'm suggesting that we have entered a sizeable correction now in terms of the emerging markets. Where might we find support on this? Well, I'm suggesting that this point here which held, which is also a mark to resistance point here which would be around the 37 level on this chart would be a useful place to be looking in coming sessions.

Moving on now to one of the specific emerging markets, the Brazilian market. Once again I'm looking at this in relation to an exchange traded fund which is EWZ. The chart on the screen right now is a monthly chart for that index and it shows effectively the recent high and the recent low on this chart, which weren't that far apart as you can see and we also have an interesting Fibonacci pattern here developing.

We have the clouds. We have this pink cloud here with the very level top and as we can see, we have come down here, this dotted green line is a 38 per cent retracement of this whole move. And the blue line which runs along the top of this cloud is a 50 retracement of the line.

My suggestion is that we will come and touch this at least in coming sessions and that would be around the 58 level.

The third chart I want to talk about in relation to emerging markets and people who specifically trade those markets is to keep an eye very much on certain FX carry trade pairs.

The one I have on the screen at the moment tracks the relationship between the EEM, as I just explained, and also the AUD/Yen cross rate.

As you can see here, there is remarkable coincidence and co-movement of these two lines showing just how highly correlated these two instruments are. But, when we move over to the far side of the chart, we can begin to see that in fact the currency pair is moving down due to the strengthening of the yen against the AUD. And in fact, the EEM is tracking it, has dropped quite abruptly here.

I would strongly emphasise that if you are going to trade the emerging markets via the ETFs I have suggested, pay close attention to key carry trade FX pairs such as the AUD/Yen, which is the one we've talked about and the AUD/USD which is becoming perhaps even more important as a carry trade currency.

Thank you very much for watching this episode of CantosCharts. I'm Clive Corcoran and I shall look forward to seeing you again tomorrow.