Technicals

Use of ETF to Trade Foreign Stock Markets

For diversification purposes, it’s a good idea to consider trading foreign stock markets via exchange traded funds (ETFs). One interesting market I’m adding to my watchlist is the MSCI Singapore Index (EWS).

From the chart below, you can tell that EWS successfully carved out a triple bottom between Oct 2008 and Apr 2009, and has since rallied to Year 2009 highs. More recently, it has broken out of a 2-month consolidation to reach new highs for the year.

A quick look at the chart above shows no resistance to $11.50, which is the support held in Mar 2008. However, a few concerns remain:

1. The 50% Fibonacci retracement level puts resistance at $10.60, only 4% higher that yesterday’s closing price of $10.15.

2. Bearish divergence of the MACD. The chart below illustrates the divergence between the ETF price and the MACD between June 2009 and today. While stock prices have reached new highs, the MACD is struggling to rise above previous highs.

I’m also going to use the above chart to illustrate a bullish divergence of the MACD. This occurred between Oct 2008 and Mar 2009. Noticed how as prices dropped to new lows during this period, the MACD was resilient and stayed way above its previous low. Such bullish divergence is a good signal that the market trend is reversing.

The conclusion is that while EWS looks like a possible buy at the moment, it’ll be worth waiting to see how the chart pattern develops before buying. I suspect we may see a false breakout for this ETF in the short term.