If you follow my Twitter account or read our content you may already know that I recently turned bullish on Frontier Markets ($FM). I was on Real Vision today pitching the Frontier Markets ETF, FM as a trade idea and wanted to write a follow-up on my post from two week’s ago as well as provide some additional color around the interview. You can watch the Trade Ideas interview here.
One of the reasons we liked FM when writing about it two weeks ago was because the ETF was showing strength relative to other Internation Equity benchmarks. As you can see in the performance chart below, this has remained the case. Since the S&P 500 ($SPY) peaked almost two months ago, FM is up nearly 7% while other equities across the world and economic development spectrum are lower.
Also note the resilience out of Frontier Markets as May’s correction was very shallow compared to other International Equity indices. FM fell just 4% peak-to-trough in May which resulted in the failed breakdown that preceded the breakout of its 10-month consolidation. Compare this with the Emerging Markets ETF ($EEM), which fell 10% during the same period and is still trapped beneath its April/May highs.
Maybe this is because Frontier Market countries are most insulated from negative trade-related headlines, or maybe it has more to do with the dollar breaking down and commodities from precious metals to crops trending higher across the board. Emerging and Frontier Market economies usually thrive in a weak dollar environment but due to the pressure on Chinese Equities and their heavey weighting in the Emerging Market Index, EEM has struggled as prices remain rangebound about 6% below their April highs. Considering all the headline-risk these days, Frontier Markets look like a nice place to hide out.
Very little has changed in terms of the setup, but last week prices whipsawed back into their prior range and retested their breakout level ~29. Make sure you read our initial article as I explain the confluence of support/resistance around the 29 level which makes it so significant. We like to build and enter positions on weakness towards our risk level because the closer our cost basis is to our stop, the better our reward/risk will be on the trade. Alternatively, we can allow ourselves more of a cushion to avoid shakeouts by adjusting our stop lower while still maintaining a favorable reward/risk ratio.
This scenario occurred in FM last week as prices ran as high as 30.20 before gapping lower by almost 4% and testing our risk level which we suggested be around the 200-day EMA at 28.70. Prices never closed below this level and never even closed below key former resistance at 29 so if you’re in the trade you wouldn’t have been stopped out.
Retests of breakout levels are common and to be expected, hence why we often suggest adding or opening positions on weakness towards them. The character of the retest can also tell you something about the forthcoming trend. In Frontier Markets for example, buyers immediately came out to support prices when they flushed lower last Monday and Friday. Both days resulted in hammer candlesticks with long lower wicks that extended below the critical 29 level but closed above it as buyers regained control of price throughout the day. This is very bullish behavior and reinforces the importance of the level where we’re defining our risk.
As far as the actual trade setup is concerned, as I mention in the interview, you can either define your risk at the top of the prior range at 29 or at the bottom of it ~28. Because we’ve allowed prices to pull in, even if we enter at today’s closing price (29.41) and define our risk at 28, the setup results in a reward/risk of about 5x using 2018’s high ~36 as our price target. How aggressive you want to be in managing risk depends on your style, but the bottom line is we want to be long Frontier Markets as long as price remains above 29 as we expect the recent breakout will mark the beginning of a new structural uptrend.