Most people look forward to the weekend.
It gives them an opportunity to rest and recharge before going back to work.
But for traders, it’s a little different. The weekend is where a trader should be the most productive.
That period between Friday evening and Monday morning is crucial. It’s a time to look at the markets while they’re closed.
When prices aren’t flying around, you can spot opportunities you normally wouldn’t. That’s why I love using the weekend to build my watchlist for the upcoming trading week.
One such opportunity I happened to spot this weekend was the iShares Emerging Markets ETF (EEM).
To be frank, I haven’t paid much attention to emerging markets over the last year. That’s because inflation has been a major headwind for emerging market ETFs like EEM.
Rising inflation has resulted in interest rate increases. This, in turn, has resulted in a relatively strong dollar. And a stronger dollar can be a big weight holding emerging markets down.
But the dollar is setting up for a steep decline. That could be a big boost that will help EEM sustain a major rally.
This kind of fundamental analysis is great at supporting a longer-term investment thesis. But for a shorter-term trade, the price chart has to look good too.
And that’s what makes the current setup in EEM so enticing. EEM has just recently broken above its 20- and 50-period moving averages (MA). These MAs are ideal for measuring short- and intermediate-term trends.
Breaking above both MAs is a positive sign. It means there’s bullish momentum in the market. And given the larger chart pattern EEM is trading within, it also allows us to calculate a high-probability target.
Take a look…
EEM is trading within a larger bull flag. Prices are currently around the middle of the flag pattern.
The bullish momentum means we’re likely to test the upper resistance line of the flag over the coming days.
The upper resistance line comes in around $41.65 (upper blue line). EEM should go on to test this level.
After testing the resistance line, we could see a pullback. Think of pullbacks like a runner needing to take a break after an all-out sprint.
When a market sprints hard to reach a certain price level, it’s guaranteed you’ll see a pullback. These kinds of sprints usually require a lot of buying power.
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Once that buying power is used up, the market will sell off a little bit. After a brief sell-off, the market will have “caught its breath” and can get ready for another sprint.
The next sprint should see EEM break out of the bull flag. That will be a clear signal to the rest of the market that EEM is gearing up for a larger run to higher prices.
If the U.S. dollar continues to sell off, that’ll be a big boost that should help EEM sustain its run.
For now, I’d look to play for the short-term move to around $41.65. If the market pulls back nicely after reaching that target, it’ll set up another opportunity for a much bigger trade.
Do you think the market will pull back?
Let us know your thoughts – and any questions you have – at [email protected].