Emerging Markets Submerged Once More (EEM)

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The bulls have lost their grip on emerging markets, and if they’re not careful, all the hard-fought gains of the past quarter will go up in flames.

iShares MSCI Emerging Markets Indx (ETF) (EEM)

For all your emerging market analysis needs, look no further than the iShares MSCI Emerging Markets Indx (ETF) (EEM). It’s the king of that space and for good reason. The daily trading volume is insane, and its options boast a deep pool of liquidity. Even institutions trading in size have little fear of knocking their noggin on the floor when they go diving in.

But, enough about liquidity, let’s take a good look at the price action in EEM stock of late.

All was going well until early May when an unexpected selling sortie cut the stock off at the knees. The heavy distribution caused EEM to slice back below all its major moving averages. And with the fund now submerged beneath these smoothing mechanisms, it’s put up or shut up time for the bulls.

EEM

Source: OptionsAnalytix

Over the past two weeks a choppy range has developed with prices fixed squarely between $32 and $33.

The eventual victor of this tug-o-war will determine the stock’s next move. EEM lovers willing to look past its recent unruly behavior should wait for a breakout above $33 before deploying new capital. Such a breach will signal buyers have established a foothold once more.

Prepare for Another Dive in EEM

If you think EEM stock is destined to continue its weak ways, look for a breakdown below $32 to trigger you in. With option premiums still being offered up on the cheap, I suggest a long put play. The capital requirement will be small, the potential profits big.

Buy the July $32 puts on a break of $32. The puts are currently being offered at $1.15, but the price will rise by the time the breakdown materializes. The max loss will be limited to the initial debit and will be lost if EEM sits above $32 at expiration.

The max gain is limited only by the stock falling to zero, so consider yourself signed up for maximum participation in any further deterioration in the months to come.

At the time of this writing Tyler Craig owned short puts in EEM.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/05/emerging-markets-eem-submerged/.

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