Global Market ETFs at Breakout Levels (EWG, EWQ)

While the S&P 500 rallied to new highs in November, some of the global markets are just now re-testing the highs of 2016. Some traders prefer buying at new highs, while others prefer buying on pullbacks during a trend. Whichever method you utilize, these ETFs have been showing a lot of strength in recent months. Having experienced weakness over the last couple years, these global markets have recently broken out of inverse head and shoulders patterns, signaling the bottoming process is complete, and a long-term uptrend could be underway.

The iShares MSCI Germany ETF (EWG) is no stranger to the $27 area. The price struggled in this area in late 2015, and it continued to provide resistance throughout 2016 (high of $26.89). On Jan. 5 the price finally broke through the level, indicating that the bottoming process is potentially complete. The 2016 low was $22.51 (June), followed by a significantly higher low of $24.55 in December. The higher swing low is a positive sign for the long-term outlook, as it signals the emergence of an uptrend. The rally above the 2016 high also broke an inverse head and shoulders pattern that formed during that year. The breakout has an upside price target of $31.27 (the height of pattern, added to breakout point).

A decline below the December swing low warns the upside breakout failed, and the price could be heading to re-test $22.50.

The iShares MSCI France ETF (EWQ) had a 2016 high of $25.22. That was marginally surpassed on Jan. 13 when the ETF reached $25.29. As of Jan. 18, the fund trades slightly below that level, at $25.04. France also formed an inverse head and shoulders pattern in 2016, with a significantly higher swing low in November ($23.07) compared to June ($21). The higher low was a positive signal for a potential uptrend, as was the breakout above the head and shoulders pattern. The pattern was broken when the price rallied above the neckline of the pattern, at $24.25, in December. This breakout region was tested multiple times throughout December, providing a second chance to get in if the original breakout trade was missed. With a pattern height of $4.22, the upside target based on the breakout is $28.47.

A decline below the November swing low warns the upside breakout failed, and the price could be heading to re-test $21.

The France and German ETFs have performed well since the June bottoms, moving above 2016 highs and breaking above inverse head and shoulders patterns. The ETFs initially started declining in 2014. 2016 now looks like the year where the ETFs were able to bottom, and bullishness is starting to enter these markets once again. The inverse head and shoulders patterns provide a price target, but this should be viewed as an estimate. The price may not reach those level, or those targets could be well exceeded over the next year to two. On the flip side, a decline below the November/December swing lows would warn that the bottoming process is not complete, and lower prices may still be forthcoming.

Disclosure: The author doesn't have positions in the stocks mentioned.