Emerging Markets Ready for Downturn

FYI: Most of these patterns could be easily invalidated by a sharp rally next week, but a downturn in EMs would conform with my macro outlook.

August has been a historically bad month for emerging markets. Indonesia is a worst-case example of this with both August and September negative for the Indonesia ETF (EIDO). It has a limited history though. EEM goes back farther and it too is historically negative in August. I do not place much stock in seasonality, by the way, but I do believe one should pay attention when "the stars align."

The blue lines are major support/resistance going back to 2011 and 2007 peaks.

The China ETF (FXI) could resolve bullish or bearish, but the gap between the support and resistance is only 5 percent.

India ETF (EPI) has broken its uptrend.

Brazil (EWZ) could stand to rally given its more localized issues, but it too has experienced a failed breakout.

Malaysia (EWM)

South Korea (EWY) isn't an emerging market, but its also experience a failed breakout, negative for EMs considering it is highly reliant on trade and China.

Emerging market local currency debt has broken out, but this was partially driven by falling interest rates. A strong dollar rally would turn this into a failed breakout as well.

Mexico (EWW) could be bottoming on extreme negative sentiment, but in context of everything, a breakdown is possible.

U.S. Dollar Index Bullish ETF (UUP) hit a new 52-week high on Friday.

Finally, here are a number of currencies. Many sport basing patterns similar to the broader U.S. Dollar Index and trade-weighted USD. There will be no significant breakdown in emerging markets without a major breakout in the dollar.

The 2019 Pivot in Asia and Freegold Too

Last year I posted 2018: The Pivot Year and Dollar Breaks Again. I also did similar posts around 2015 or 2016. The posts were based mainly on technical analysis, with charts indicating a possible shift in market direction. Commodity charts and commodity producing countries had inverted head & shoulders patterns completing back in 2016. Last year and this year, there are false breakouts that reversed. Last year, I stuck with my macro position on dollar strength despite some dollar weakness and chart breakouts and it was the correct one.

Right now, the number one chart is still the U.S. Dollar Index, but for now the most important "subchart" is the offshore yuan, USDCNH. The PBoC chief drew another redline at 7.00. 人民币会“破7”吗？刚刚，央行副行长给了颗定心丸！ For myself, a move through 7 to 7.25 or 7.50 is fine if it is driven by the U.S. dollar. If DXY is above 100 or at 105, USDCNY 7.25 signals nothing more than dollar fluctuation. Yet the PBoC has boxed itself in with a narrative here. The risk isn't that CNY goes through 7 as much as the "ominpotent PBoC" "they have reserves and can force the market whichever way they want" narrative dies.

iShares MSCI Emerging Markets (EEM). The red horizontal is from the 2011 top, the blue from 2007. Prices are $40.01 currently and $39.72. A break below these levels could invalidate the 2017 breakout. Support is down near $34 if it breaks. EEM is trading at $40.11 in pre-market on Monday.

Trade is the big story and South Korea is an economy that lives and dies by global trade. ROK's trade surplus was 8 percent of GDP in 2017, exports and imports combined for 70 percent of GDP. The target for USDKRW, if that's a completed H&S pattern, is 1250. If USDKRW makes it there though, it's likely there's breakdowns elsewhere, such as USDCNH. As for the iShares MSCI South Korea ETF (EWY), it has a failed breakout, major support around $45. EWY is below its 2018 low.

Below are several Southeast Asian ETFs. Indonesia (EIDO) is close to have a major test of support.

For "corroboration" here's the S&P 500 Index. The blue line is the trendline from the 2009 Satanic low of 666. It must recapture 2895.

Finally, here's the ratio of GLD to SLV, and GDX to SIL.

I won't rehash the topic here, but in quick and simple terms, freegold is the "freeing" of gold away from a medium of exchange and into more of a monetary asset, mainly a reserve asset that might be likened to Bitcoin's role in the cryptocurrency ecosystem (if transaction speeds never pick up). Gold is money as they say, whereas even silver has substantial industrial demand. The exchange rate for money/currency can be set an any amount. The dollar can equal 100 yen or 1,000,000 yen, and the economies adjust around that exchange rate. Obviously a transition from 100 to 1 million between dollar and yen would wreck the Japanese economy, but the initial exchange rate doesn't matter. Had they set it in the millions, we'd all be saying USDJPY 1 million. The same is almost true of gold (it does have some industrial users that will be upset by a soaring gold price) because it is money. Moreover, if all fiat currencies crash versus gold, the economy suffers a less disruptive adjustment because relative prices and exchange rates won't be as directly impacted they way they would if a similar collapse took place against oil or agriculture. USDJPY is 100 and gold is $1300 an ounce and USDJPY might be 120 if gold is $5000 an ounce. Finally, soaring gold valuations life central bank reserves, shrinking their debt levels and allowing them to restart the credit system.

In practice, freegold will be visible in the price of gold breaking away from silver, other precious metals and all commodities. The gold/silver ratio

Since this chart is about pivots, this might also be a great time to be buying silver. It might be a great time to buy emerging markets if you think the dollar is peaking. Both the silver and EM trade should be powered by global inflationary forces. Or maybe the larger trend is still in place, but it's time for a short-term trend reversal. If instead there's a breakdown in emerging markets and gold takes on greater monetary status, it is likely deflation is out of control again. Currency volatility will take off. For myself, I'm still leaning towards a higher U.S. dollar and trouble ahead.