The twin terrors of tariffs and a strong U.S. dollar are haunting emerging-market stocks. But I suspect peak pessimism — at least in the short run — has been reached. And that spells opportunity for the contrarians among us. Let’s take a look at how to game a rebound in the iShares MSCI Emerging Markets Indx (ETF) (NYSEARCA:EEM).
Since powering to a new multiyear high in January, EEM has struggled mightily. Its weakness stands in stark contrast to the mighty muscle-flexing by U.S. stocks as illustrated by the Russell 2000 Index which tagged yet another new record high yesterday. All told, the EEM ETF is down 15.7% from its January high-water mark.
Many support levels have been breached along the way, including every single major moving average. The current downswing is getting mega-stretched. With yesterday’s down-gap, emerging markets are now down nine days in a row reaching deep into oversold territory.
So says the Stochastic indicator, which is sinking below the 20 level like a stone.
Any way you slice it the rubber band is stretched taut and due for a snap-back.
Volume patterns are also supporting a capitulation call. Participation has been climbing for the past five days with Monday marking the highest volume since the January crash. Distribution days like these are bearish until they become climactic. Such a monster exodus could signal the last vestiges of weak hands have been wrung out, and the stock is now ready to recover.
Bank on an EEM ETF Recovery with Naked Puts
Implied volatility has lifted modestly during the turmoil and is breathing new life into what had become puny option premiums. Couple that with my desire to build a high-probability trade and I think naked puts are worth a shot here. Sell the July $43 puts for 50 cents or better.
The max reward is limited to the initial premium received.
As of this writing, Tyler Craig held bullish positions in EEM. Want more education on how to trade? Check out his trading blog, Tales of a Technician.