Back in early June, we featured the VanEck Vectors Emerging Market Local Currency Bond ETF (NYSE: EMLC), when China and the U.S. appeared ready to end the trade war once and for all.
Obviously, things didn’t quite work out between the two world superpowers like many investors had hoped.
However, we were able to ride that trade deal optimism to a huge gain, as the EMLC surged right past our trade trigger at $33.20. It quickly rose to $35, which may seem like a small gain when compared with other stocks. But the EMLC doesn’t move that much, and an at-the-money call option (at the time) would’ve returned well over 100% on the trade.
And then again, back in late July, we looked at the iShares Emerging Markets ETF (NYSE: EEM). It’s similar to the EMLC in that it’s focused on emerging markets, but unlike the EMLC, it’s not specifically tied to local currency bonds.
For that reason, the EEM tends to move “sooner” than the EMLC.
And right after we featured the EEM, it dropped like a stone past our trade trigger to the downside, breaking out of its triangle formation.
The EEM fell over 5% in the weeks following our analysis and eventually bottomed out around an 8% loss, which again, would have generated a gain of well over 100% with an at-the-money put option.
So, with Hong Kong in the headlines after a small victory for the local protestors, it’s no surprise that the EEM has formed another great setup.
This time, it’s to the upside, though, as investors have grown highly optimistic about the situation in Hong Kong.
In the weekly candlestick chart above, you can see that EEM is in a great position to move upwards. Contact with the lower Bollinger Band was made about a month ago during the ETF’s sudden drop, and since then, the price action has been highly positive.
The current weekly candlestick is trading above the highs of the last four, meaning that it’s technically already “triggered” a long position as the current price has broken out past resistance from August. Better yet, the stochastics remain low despite the recent buying, suggesting that EEM may still be oversold.
But instead of simply going long here right away, it might make sense to push that trade trigger a little higher; above this week’s high, perhaps. Because there was such a large daily gain after the Hong Kong news broke, we might see a correction over the next couple of days.
Meaning that in order to feel confident about taking a long position on EEM, I need to see more positive price action. In the end, it could shave a few points off a winning trade.
But it’s better to have a smaller winner than a trade that triggers right before heading south, ultimately becoming a “problem” trade as it chops sideways indefinitely.
However, based on the way we framed EEM in the chart above, that can mostly be avoided. That’s not to say it won’t happen for certain, though. Anything’s possible when it comes to short-term trading (and investing in general).
But by being conservative here, we’re able to mitigate significant risk while preserving most of position’s profit potential.
Which, based on how the emerging market ETFs have behaved over the last few months, is very high. If we’re right about this one, that’s three winning emerging market trades in a row.
All while the general market struggles with uncertainty.
