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.

EM Decline: India Next

The next leg of EM decline should see India complete its topping pattern.

ZH: India's NPL Crisis Erupts: A Major Shadow Bank Defaults On Three Debt Payments

With the meltdown of IL&FS in motion, another unit, IL&FS Transportation Networks, reported that its chief financial officer, Dilip Bhatia, was demoted to chief strategy officer, for the goal of divestment of assets. The regulatory filing said Bhatia would relinquish his responsibilities as CFO with immediate effect, and the company will search for a replacement.

The shockwaves spread further on Friday, when IL&FS Financial Services, another unit of the IL&FS group, said its managing director and chief executive had resigned.

Why is this important? IL&FS’s outstanding debentures and commercial paper account for 1% and 2% respectively, of India’s domestic corporate debt market as of March 31, according to Moody, while its bank loans made up about 0.5% to 0.7% of the entire banking system loans.

And while bad loans in the Italian banking system have received a ton of attention from investors, India is not far behind and India's economic recovery is built on an even shakier foundation.

India ETFs in U.S. dollars are tracing out a topping pattern, but the Sensex is still in an uptrend.

India Looking Toppy, China Back at LT Support

Emerging markets are threatening a major breakdown

India Breaks Out

Indian Exit Polls Show BJP Headed for Victory in Record Election

Official results are to be announced by the national Election Commission on Friday for the vote in the world's largest election, which began in April and ended Monday.

A series of exit polls over local television networks on Monday evening projected that the BJP and its allies would win roughly 250 to 280 of the 545 seats in the lower house of the Indian Parliament. If those results are correct, it would put the BJP in a position to form a government.

India is single handedly holding up the BRICs.

There are several India ETFs in the U.s., including EPI, INDY and SCIF.