Proposed Reversal Pattern

Market leadership has been shown in the emerging markets (EMS) over the last decade. Their near-term action is likely to be a key ingredient to most world market's future. A long-term technical chart of the emerging markets ETF suggests that the jury is still out on whether the long-term picture is going to remain bullish or if a key long-term reversal is in play. The three-year weekly chart is illustrated below.

Most of the discernable long term features of the chart point to a bearish picture which has not been confirmed. First, the highly liquid ETF is showing high volume selloffs and low volume rallies. This divergence has been occurring since October of 2009. In the chart below are illustrated some of these key volume divergences by the vertical line annotations. Especially notable is the April 2010 high which was made on very low relative volume. The most recent rally off of the May bottom is occurring on diminishing volume. Again price and volume are diverging.

Another potentially bearish feature of this chart is the convergence of the 10, 25 and 40 week moving averages. A failure of the price action around these flat or downward sloping moving averages would confirm the bearish action in the intermediate to long term.

Finally, there is the formation of a head and shoulders reversal. However, one should be cautioned that the pattern is not confirmed until it is completed. Completion of the pattern would have to be confirmed by a weekly close at about $35/share or less. One cannot rule out that the pattern would resolve in a bullish manner by clearing the moving averages to the upside by a decisive margin without breaking below the neckline of the proposed pattern. The head and shoulders reversal pattern tends toward symmetry and accordingly, one would expect some more "work" to occur on the right shoulder to provide such symmetry.

Another key sector whose technical action needs to be considered in the context of overall market implications is that of the European banks. Consider the chart of Deutsche Bank (DB). Here we see a stock with both poor price/volume action, and downward sloping moving averages. While the two week rally would seem to have further to run, over the intermediate term, the trend looks to be going down.

Today’s Market

If there is a short term window into the market, I would suggest Apple (AAPL) as that window. Today it approached its all time high with a gap up at the open. If AAPL begins to surge higher, its market cap will approach that of the highest market cap stock in the Dow—Exxon Mobil (XOM). This would indeed be an extraordinary event and it would say a lot about the market's capability to move higher on optimism.

Conversely, if Apple—the leader of the pack with the most legitimately bullish story ever—were to falter at its all time high, then this would project bearish implications upon the rest of the market.