Emerging markets breaking out according to chart

Published Mon, Aug 15 20161:20 PM EDTUpdated Mon, Aug 15 20161:25 PM EDT

While Dow and S & P 500 records are stealing the headlines, the biggest breakout is taking place in emerging markets stocks. An exchange-traded fund tracking the sector just posted a bullish inverse head-and-shoulders pattern, suggesting more gains are ahead, according to technical analysts. "With the iShares Emerging Market ETF closing firmly above the neckline of that inverse head-and-shoulders pattern, we think there is further upside ahead," wrote Jonathan Krinsky, chief market technician at MKM Partners. Since closing near a seven-year low in January, the EEM is up more than 30 percent. Source: MKM Partners " In our July 31 note , we suggested that EEM was close to breaking out above a pretty significant base. Now that it has done so, the measured move of the inverse head and shoulders pattern measures to $44, which also happens to be the 2015 highs," Krinsky wrote. That price target represents a gain of 17 percent from Friday's close. The analyst notes the rally in the EEM placed the ETF above a "pretty significant base," while the inverse head and shoulders, a chart pattern used to predict the reversal of a downtrend, backs up the positive momentum. "The trend has turned," Krinsky emphasized, explaining that emerging markets appear to be out of the woods. "The 40-week moving average has flattened out and begun to turn higher, and the ETF has made a significant 'higher low', and 'higher high' over the last few months," he wrote of the positive momentum. Source: MKM Partners Another encouraging sign for the group is that emerging market stocks have begun to outperform the U.S. "While the long-term trend of emerging markets vs. the U.S. has not fully reversed, it has broken a multiyear downtrend and made a 'higher high,'" Krinsky wrote. The latest data also show market breadth among foreign stocks reached the highest level since 2014, while a spike in volume also confirms the breakout, according to Krinsky's analysis. Market breadth is used by technical analysts to gauge investors' sentiment by comparing the number of advancing companies to those declining. This year, foreign indexes came back to life, with stocks in Brazil, Argentina and Russia up more than 25 percent in 2016, compared with a gain of 7 percent for the U.S. benchmarks.

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"With the iShares Emerging Market ETF closing firmly above the neckline of that inverse head-and-shoulders pattern, we think there is further upside ahead," wrote Jonathan Krinsky, chief market technician at MKM Partners.