Trend strength to continue on this Asian market play
Investors beware: popular market myths should be taken with a grain of salt. One of the most popular myths of 2013 was the flight of capital from Asia and the emerging markets. The facts tell a different story and provide an investment edge.
Here are three market returns from the start of 2013 to mid-January 2014: 32 percent, 29.9 percent and 28.6 percent. These are good returns that come from a surprising mix of markets. Can you guess what they are?
The 32 percent return comes from the S&P 500, the Dow delivered 29.9 percent and the S&P Asia 50 Exchange Traded Fund delivered 28.6 percent. The ETF tracks the top 50 stocks from Hong Kong, Taiwan, Korea and Singapore and provides an effective way to trade the performance of these markets.
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Individually, some of these markets were lackluster in 2013. Korea traded sideways and Singapore struggled to end 2013 in the black, while Taiwan provided up-trending activity and Hong Kong had a year of rallies and retreats. Collectively, the top 50 stocks provided a steady uptrend after an initial selloff in the first quarter of 2013.
Can we expect this trending growth to continue in 2014? The answer depends on the strength of the underlying trend, which we evaluate using the Guppy Multiple Moving Average indicator.
The Guppy Multiple Moving Averages (GMMA) display uses two groups of moving averages: a short-term group, which shows the activity of traders; and a long-term group, which shows the activity of investors. There are three components to the analysis.
First is the degree of separation in the long-term GMMA. The wider and more consistent the separation, the stronger and more stable the underlying trend.
Second is the behavior of the short-term group of averages. Stable separation shows trend strength and stability, while lack of compression and expansion activity confirms trend stability.
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Third is the pattern of separation between the two groups of moving averages. Consistent separation confirms trend strength and stability.
The S&P Asia 50 Exchange Traded Fund chart shows a well-established stable trend. This suggests that the current retreat will find support in the area between $49 and $51. There may be some temporary price dips below the long-term GMMA like those in area A and B. These were buying opportunities as the long-term GMMA also remained well separated.
The key signal of a trend change is when the short-term group of moving averages moves below the lower edge of the long-term group of moving averages. The current strength of the trend suggests this is a low probability outcome. The higher probability result is a rebound from the area between $49 and $51.
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The chart behavior does not provide clues to the targets for 2014. There are no chart patterns that allow for price projections. However, the strength of the underlying trend suggests continued up trend strength. The impact of U.S. tapering may be much less than market chatter suggests.
— Disclosure: The writer holds an open position in the S&P Asia 50 Exchange Traded Fund.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders – www.guppytraders.com. He is a regular guest on CNBCAsia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.