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International fund (EFA) under accumulation

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by , 07-14-2012 at 07:04 PM (1633 Views)
Thatís right. Despite all the problems in Europe, EFA (iShares MSCI EAFE Index) NYSE has been under accumulation since mid-May, with an increasing rate during June, as viewed in the bottom panel in the chart below. A large wedge is forming on the chart, which normally (but not always) breaks in the direction of the prevailing trend. There are three touches of the lower boundary, and depending on how you draw the upper boundary, may have either 2 or three touches. An alternative to what I have drawn would show the upper line coming in near the 200 ema and contain the two candles that are above the line. At any rate it is a wedge, and wedges gather energy like a coiled spring for a dramatic move once they near the apex. A move upward should stall briefly near the 200 ema, the previous high and then move toward the upper resistance line I have drawn. The total move could be 7%, without considering the effect of the US dollar differential. On the same chart the RSI indicator is above neutral (50), the slow stochastic is pointing up, while the ROC shows a bit of a negative divergence. It will be important for the red line on the ROC to be exceeded in the coming sessions. The ADX indicator shows an intermediate term buy signal on June 29th using the extreme point rule.

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To determine if the EFA trade (I Fund), if advancing as postulated, would be beneficial for TSP participants or not, I have shown the daily and weekly $US charts as UUP (PowerShares DB US Dollar Index Bullish Fund) NYSE to hunt for clues. Last week I showed the relationship of the Euro and $US, and for the last several years they have tended to mirror in an inverse relationship. Therefore in this blog, we are looking only at the $US charts in the daily and weekly timeframes for clues of a turn. The EFA also includes other countries outside the Eurozone, as a proportion of the index, and therefore other currency pairs and daily gains and losses, making calculations much more difficult. The perfect trade would need the EFA to be advancing, while the $US is falling against other currencies. That way, when the daily EFA share value is calculated, and then adjusted for a weakening $US, the percent gain is magnified by the currency pair(s) differential. Conversely a strengthening $US dilutes the gain for a given EFA daily closing price and negatively affects the TSPís international (I) fund. Perhaps some kind of liquidity announcement from the European Central Bank, or the FED and Bernanke offering quantitative easing (QE) again at their next meeting later in the month, or even the expectation of it as the catalyst for a falling $US? It seems reasonable that in a Presidential election year the incumbent would pull some sort of strings.

On the daily $US chart we see a rejection line that has turned away the advance of the 5 ema three times since January. If this relationship holds, then the $US should decline in the coming days. There is a pronounced negative divergence on the RSI and MACD indicators (price advancing, while the indicators are declining). The slow stochastic is declining as well, while the ADX indicator is trendless. The picture is a bit murkier on the weekly $US chart. Last week, I showed an ascending triangle, but can also be drawn as a wedge. The RSI has equal highs (class C divergence), which is the weaker case of divergences. The slow stochastic is still on its way up and does not often have turnaroundís at this level as indicated by the horizontal line. The uptrend is still intact but choppy as seen by the ADX indicator, while the MACD shows a long term negative divergence.

In conclusion, the EFA, as a surrogate of the TSPís I fund may be setting the table to advance; especially if the almost completed wedge is broken to the upside. Accumulation has been underway for several months, with acceleration in June. The daily $US chart shows that there is a probability for a short term decline, while the longer term weekly chart still indicates substantial strength. The perfect trade may set-up in the short term, but if the $US is not coaxed to decline by some sort of liquidity or currency manipulation, the trade may disintegrate in the intermediate term.

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Comments

  1. nsurf9's Avatar
    Uptrend, I just quickly read your post. Real good stuff!! I got to read it again and digest the possiblities.

    I've been watching the I fund (EAFE) since January to close in on the S and C funds, the Euro empty rhetoric just keeps going down the drain with the rest of Europe. It (I fund) has made a little pop (~7-8% at one point, if my memory seves me).

    If the ECB really does come thru and the US Fed does a QE3 my thoughts too are that the I fund will likly really be off to the races. And, yes it can move fast!
    Updated 07-14-2012 at 08:48 PM by nsurf9 (edit add)

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