The iShares MSCI Emerging Markets ETF (EEM​) has been on a steady progression higher for the past 11 months, ever since hitting a swing low of $33.94 in December of last year. Last month, EEM reached a high of $47.93 before it started to weaken. From the December low to last month's high, EEM had advanced $13.99, or 41.22%. During that advance, there was a steady pattern of higher monthly lows and higher monthly highs, which identified an uptrend. As of yesterday, that pattern has changed.

Monthly technical chart showing the performance of the iShares MSCI Emerging Markets ETF (EEM)

Bearish Trigger

Yesterday, Dec. 6, EEM dropped below the prior monthly low of $45.45 and closed below that level on a daily basis. At the same time, both the 14-week relative strength index (RSI) and the 14-month RSI have turned downward, falling back below 70 after being overbought with readings above 70. Furthermore, EEM fell below its 55-day exponential moving average (EMA) this week for the first time since January and closed below it on a daily basis. This analysis points to a potential change in trend that could see the EEM ETF have its largest correction in a year.

If EEM Does Continue to Weaken, How Far Might It Fall?

The last correction of any significance started from the September 2016 high and lasted around 13 weeks. A maximum drop of 10.4% occurred over that time frame. If a similar decline happens in the current pullback, EEM would reach approximately $42.95. That is one possible target. A second target is the support level of the long-term downtrend line.

The long-term downtrend line, which starts from the $55.83 record high hit in October 2017, represented resistance for many years – until this year. In July, EEM broke out above the trendline for the first time. At that point, price continued to advance higher, and momentum increased as price moved away from the line. This is bullish behavior setting up expectations for an eventual continuation of the uptrend once a near-term correction is complete.

Weekly technical chart showing the performance of the iShares MSCI Emerging Markets ETF (EEM)

Resistance Becomes Support

In an uptrend, once price breaks through resistance, it will typically head back toward previous resistance at some point to test it as support. So far, for the larger developing uptrend structure, that has not yet occurred. Therefore, the weakness we are starting to see now could easily continue until it reaches support of the downtrend line. The price represented by that line will vary depending on when it is reached, but for discussion purposes, the $42.00 area looks like a good estimate.

There is also another price area to watch for support – just slightly above the $42.00 level at $42.53. That's where the 38.2% Fibonacci retracement of the internal uptrend line completes.

The Bottom Line

Once a trend begins, it has a tendency to continue for a while. Therefore, this week's bearish signal may just be the early stages of a relatively short to intermediate-term decline for the emerging markets ETF.

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