Unlocking of Overhead Supply Biggest Fear in EEM

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Our biggest fear in Emerging Markets is not simply forex of the strong dollar testing the 97 handle, nevertheless the repeated IMF global downgrades. It’s simply the unlocking of overhead supply of the distribution. Below we examine, EEM             on a weekly basis and discover unlocking of overhead supply started in the 2H11 timeframe.

The orderly liquidation of EEM             started in an orderly fashion in the 2H11 timeframe to present date. In August 2015, an important 4 year support level was violated to the downside accelerating the liquidation into panic mode of 1Q16 timeframe. EM managers across many banks advertised the market saying to buy the dip in 1Q16, as central banks attempted to curb dollar appreciation. First of all, if managers are advertising a market, you know its in trouble, and their desks need to distribute. Well, so far it’s worked, since 1Q16, EEM             is +30%, but we believe this is merely a counter trend.

So, what do we know. Dollar strength is back to levels seen in 2H15 to 1Q16 timeframe. Important 4 year support has been violated to the downside ( EEM             ). Unlocking of overhead supply from the 41 point of control will make further probing into 38 extremely difficult. Thus, could spark sellers from the point of control and continue the overall downward trajectory.
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