It’s hard to ignore the media coverage on global markets these days – I find myself avoiding CNBC during market hours more and more just to keep my focus where it needs to be. Across all major news sources we’ve heard a lot in the last year, the Dubai Debt Crisis, European Debt Debacle (P.I.I.G.S), fear of a U.S. double dip and more, but many investors missed the stealth success of an emerging BRIC (Brazil, Russia, India, China) country. Despite tepid performance across the BRIC countries in recent months India has persistently remained strong over the last 24 months and just this week hit 31 month highs.
Let’s delve into this surprising trend and determine if you should be chasing or fading this emerging powerhouse. I like to look at India based on three different time frames using three different technical based systems – this is the strategy that I use in the ETFTRADR portfolios each day. I call it a 3X3 strategy where I constantly monitor three time frames and three time-frame-unique systems, which provides diversity on indicators and periods. If you are interested in learning more about strategies we use I recommend joining Freemium TRADR, it's the easieast way to become a rockstar ETF TRADR. We’ll use the Wisdom Tree India ETF (NYSEARCA:EPI) since it has far better liquidity than other India ETFs (INP, IFN). In the last two years EPI has gained more than 20% outpacing the BRIC Index (NYSEARCA:BKF) and the S&P500 (NYSEARCA:SPY) significantly.
Let’s start with the bird’s eye view and weekly charts. The INVESTR system, which uses William’s % R, moving averages and Parabolics, has been extremely effective in 2010. The trend based system does show extreme strength, however, is it too strong to chase now? In my view, it’s not a good time to enter based on weekly charts – traders do not want to fight the current on EPI, but rather look for lower risk entries. Take a look at the chart below; I’ve highlighted several different entry points based on this type of bull retest. I look at 80 or 50 level retest to provide advantageous entry prices. The key is marking the retest bar’s low as your stop.
Wisdom Tree India (EPI) – Weekly INVESTR System
OK, so the weekly chart looks a bit overextended but strong so now let’s shift down to the daily charts. I use a stochastics based system for daily charts that provides more specific entry and exit points. Most recently we saw a stochastic based buy signal at the open on Monday. My first take-away is similar to the weekly chart—the daily looks very strong but potentially too strong to chase. Again, I would look for a retest on stochastics (a dip below the bullish threshold at 60) and place a stop at the bar’s low. I’ve also highlighted recent instances where this occurred in the chart. After missing a breakout like this it’s best to wait patiently for the pullback/retest.
Wisdom Tree India (EPI) – Daily Chart
Finally, let’s drill down to the hourly charts. This view really exposes the recent breakout strength in India. My hourly system looks for extreme strength by looking for trends that confirm outside both Acceleration Bands and Bollinger Bands, which makes the signals fast and very accurate. Dependent on your level of trading activity you could see a short signal on EPI hourly far before daily or weekly, however, it shows the true strength of the trend that EPI has not signaled a short since May on the hourly chart.
Wisdom Tree India (EPI) – 60 Minute Chart
How Much More Can It Go?
This is where the rubber meets the road—should you fade or trade EPI after it’s multi-month run? Similar to my views on agriculture commodities and gold trends there is little reason to fade India (EPI). The longer-term trend has established itself as one of the strongest in the global economy and historically leaders continue to lead while laggards continue to lag. That being said, there is a well defined argument for EPI being overbought on the short-term, which means patience is the best trade now. At this point all time frames are suggesting that a better long entry will develop. Similarly, all three time frames show little evidence that fading this trend will lead to profits.
Andrew Hart - ETFTRADR
Disclosure: No positions