The iShares MSCI Emerging Markets Indx (ETF) (EEM) Will Pad Your Pockets

Worry has come to Wall Street. Its arrival has officially ended one of the least volatile spells stocks have seen in decades. The damage has been particularly potent in the land of small-caps. The Russell 2000 fell 2.7% for the week, smacking any and all complacency from the face of beefed up bulls. There are a number of takeaways from last week’s drubbing, but what interests me most in today’s missive is the effect the high anxiety has had on foreign markets. The iShares MSCI Emerging Markets Indx (ETF) (NYSEARCA:EEM) in particular looks ripe for a trade.

Beat the Bell

One of the benefits of having a global watch list is it increases the number of potential plays that come across your desk. The American trader who obsesses over U.S. indexes only fails to spot opportunities arising elsewhere in the world. For that reason, EEM and some other country and region-based exchange traded funds line my watchlist.

While one appropriate response to last week’s super spike in the CBOE Volatility Index is to batten down the hatches and go into defense mode, another is to look for hot stocks that are finally returning to Earth. It’s these market leading securities that provide the most attractive dip buying opportunities. Not the weak-sauce ones that have shattered support and look like a dumpster fire.

That’s exactly why EEM belongs on our radar for the week ahead. Its trend has been one of the most consistent and well-behaved of any major market ETF.

EEM Eye Candy

The everyday emerging markets lover has a slate of evidence to back up their affection. To ensure we don’t mistake the tree for the forest, let’s begin with a glance at the weekly time frame.

Before this year, EEM was plagued by relative weakness. While the S&P 500 climbed to record high after record high, emerging markets were wallowing in the dirt. But not any longer! The pendulum has finally swung back in the other direction, and EEM is back en vogue.

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Source: OptionsAnalytix

This year’s ascent carried the fund back above a multi-year descending trendline. The nascent strength was sufficient in driving the Relative Strength Index (RSI) indicator to its highest level in over a decade. That’s some muscle flexing! Even with last week’s drop, EEM still remains above a rising 20-week and 50-week moving averages.

The only thing that should give buyers pause is the cluster of old highs in the $45 zone. But while that might concern me if I was piling in at $44, it doesn’t much matter if I’m able to initiate exposure near $40.

Thursday’s high-volume sucker punch is obviously concerning to EEM bulls in the short run. However, the emerging markets ETF remains above a rising 50-day moving average with numerous support levels resting beneath, so it’s premature to abandon ship here.

While we could see some downside follow through in the week ahead, buying shares near $40 looks attractive.

Click to Enlarge
Source: OptionsAnalytix

Get Paid to Go Shopping

Implied volatility is finally making a comeback. EEM ended the week with an implied volatility rank of 52%, its highest reading this year. And that means option sellers have the chance to sell premium for a much bigger payday than they’ve been used to all summer long.

If you have a bullish bias, sell the Sep $40.50 puts for 35 cents or better. By selling the puts, you obligate yourself to buy 100 shares for each contract sold at a cost basis of $40.15. That’s the worst-case scenario. The best-case scenario is to have the fund sit above $40.50 at expiration, resulting in you pocketing the max gain of 35 cents.

As of this writing, Tyler Craig held bullish option positions in EEM. Want to learn how to master the art of option selling for high-probability cash flow? Check out Tyler’s recently released video series through Tackle Trading on how to systematically sell iron condors for monthly income.

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