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Traders often look for relatively
easy ways to monitor the battle between "risk-on" and
'risk-off". Given that foreign stock indexes have lagged the S&P 500
in recent months and the center of the risk universe sits in Europe, you can
make an argument the fate of the EAFE Index will determine the fate for the
vast majority of risk assets. A partial list of the MSCI EAFE Index Fund's
(EFA) country weightings is shown below.
Tom DeMark,
of Market Studies, LLC, has his own set of proprietary tools to determine and
monitor key support levels. Last week, EFA closed below DeMark
support levels on its daily, weekly, and monthly charts. The longer EFA
remains below these levels, the more concerning it is for all risk assets in
the short-to-intermediate term. Conversely, if EFA can recapture the levels
shown below, it gives some hope for a risk rally.
On May
13, we described how to estimate possible downside "targets"
when a market has a set-up for a head-and-shoulders pattern. A much
longer-term, and potentially bearish, head-and-shoulders set-up appears to be
forming on the weekly chart of EFA. The green lines show a possible downside
target of 33.55, which represents a 27.5% decline from the pink neckline. The
pattern becomes much more meaningful from a probabilistic perspective if
price violates the pink neckline. For now, the pink line represents a possible
area of support.
The weekly chart of the EAFE Index
below shows possible levels where buyers may become interested (a.k.a. support).
The most important levels relative to the head-and-shoulders pattern shown
above are 45.90, 44.91, and 43.27. Each successive break of those levels
would increase the probability of the head-and-shoulders pattern taking
prices toward 33.55.
It is extremely important not to
assume a bearish head-and-shoulders set-up will produce bearish outcomes. The
term "set-up" hints at probabilities, not certainties. The S&P
500 Index had a head-and-shoulders set-up in early October 2011. The set-up
did not produce bearish outcomes.
This article provides several key EFA
levels to watch. With policymakers and central bankers waiting in the wings,
it is best to monitor the levels with an open mind. A break of support
becomes more meaningful if it can carry into week's end. The violations of
the DeMark support levels shown previously did
carry into the end of a week, which means we need to respect that weakness
could continue in global markets
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