Perpetually under-performing international equity markets are testing critical support.

With the selloff in the U.S. stock market this week, it is easy for domestic investors to lose sight of one thing: it could be a lot worse. As in, one could be heavily exposed to international markets and subject to the disproportionate damage that has afflicted many of those markets for almost a decade now. For example, let’s look at the performance ratio between the MSCI Europe Australia & Far East Index, a.k.a., the “EAFE”, versus the S&P 500. After topping out in late 2007, the ratio has been on a relentless decline. And in the past few days, the ratio has dropped to a fresh all-time low, yet again.

This chart is just a reminder of 2 things. First, international equity markets have severely under-performed the U.S. for some time now, largely due to the terrific run in U.S. stocks. Secondly, while the trend will eventually reverse, it shows no sign of doing so imminently.

If we look at the EAFE in absolute terms, we find it at an important juncture in the context of its post-February intermediate-term rally. After bottoming in February, the index was able to break above its post-May 2015 Down trendline in April. This allowed it to pop higher by another 6% or so, temporarily. The EAFE has since dropped back down, testing the breakout point successfully in mid-May before resuming its short-term downtrend in the past few weeks. Currently, it is testing an arguably make-or-break level as it pertains to the survival of the post-February rally.

As the chart shows, the index is presently testing the confluence of A) the top of the broken post-2015 Down trendline and B) the 61.8% Fibonacci Retracement of the February-April bounce. If this area gives way, it will very likely be the nail in the coffin for the post-February rally. Thus, if these international markets wish to extend the bounce, they best get it going right here and now.

Consider this their wake up call.

________

More from Dana Lyons, JLFMI and My401kPro.

The Most Important Chart In Foreign Equities Threatening Major Breakdown

On October 17, at the depths of the October global equity sell off, we posted that "International Stocks Were Testing Major Support". The post was in reference to the MSCI EAFE Index (Europe, Australiasia and Far East), probably the most widely followed international stock index. The EAFE was testing (and slightly undercutting) a major confluence of Fibonacci Retracement levels at the time. We stated in the post:

We are not fans of trying to catch falling knives. However, when we do, it is only into significant support. The MSCI EAFE is testing the strongest possible cluster of Fibonacci Retracement support. If it can reclaim the 1740ish level, it could set the index up for a significant rally, at least in the intermediate-term.

The EAFE did indeed reclaim that level the very next day and was able to rally some 9% over the subsequent 6 weeks (before it ran into resistance). In mid-December, the EAFE tested the October lows again before bouncing (to a lower high) into the end of the year. And yesterday, the index revisited the lows yet again. As the saying goes, the more times a level gets tested, the more liable it is to break, particularly if the period between tests is getting shorter. Should the MSCI EAFE break this support, it could be a major bearish development for stock markets globally.

As we mentioned in the October post, the Fibonacci confluence near the 1730-1740 area includes these levels:

23.6% Fibonacci Retracement of 2009-2014 Rally ~1742

38.2% Fibonacci Retracement of 2012-2014 Rally ~1734

61.8% Fibonacci Retracement of post-June 2013 Rally ~1748

On top of those Fibonacci levels, a decisive break of this area would also break the up trendline connecting the 2009 & 2012 lows, on a logarithmic scale. Should this breakdown occur (as the EAFE is threatening to do today), it would open up roughly 10% more downside to the next major support area. That support area around 1570-1590 is based on the next levels in the Fibonacci sequence from the aforementioned lows:

38.2% Fibonacci Retracement of 2009-2014 Rally ~1582

61.8% Fibonacci Retracement of 2012-2014 Rally ~1570

1590 was also the area of the June 2013 low. Furthermore, a 161.8% Fibonacci Extension below the range of the October to November rally would put the EAFE precisely in the 1590 area.

While a 10% drop may not seem like the end of the world, it would signify the loss of the entire rally since June 2013. Additionally, while the break of the post-2009 trendline doesn't necessarily kill the cyclical bull market, it does seriously weaken it. On top of that, should the U.S. (finally) experience a correction of its own, the negative reverberations could certainly effect the foreign markets.

That is why this is the most important chart development we are monitoring at this moment in time.

__________

European stocks *should* bounce here

On August 13, we mentioned that European stocks, as represented by the MSCI Europe Index, had bottomed a couple days prior at precisely the right spot. By right spot, we mean as suggested by Fibonacci Retracement levels (see that post for a little more info on Fibonacci numbers). These key Fibonacci levels, indicated at the 1680 level, were derived from prior lows in June 2012 and June 2013. Sure enough, the Index bounced on August 8 at precisely 1680.

As we mentioned in the post, European stocks had been deteriorating for several months already, threatening the durability of the post-2012 uptrend. Thus any bounce off that 1680 level would likely be shorter-term in nature, "weeks to months" as we put it. Indeed the MSCI Europe Index was able to bounce for exactly 4 weeks before resuming its weakness.

It has now reached the next Fibonacci "cluster" of key Fibonacci Retracement support around 1575, as signified by the following:

38.2% Fibonacci Retracement of 2012-2014 Rally ~1575.20

61.8% Fibonacci Retracement of 2013-2014 Rally ~1575.91

The MSCI Europe Index opened yesterday at 1575.90 and was able to close slightly above that level. With many global equity markets mired in quasi-waterfall type selloffs currently, the risk is greater right now that indexes will "overshoot" potential support levels. That said, the MSCI Europe Index, along with many of the individual nation markets on the continent, have already been beaten down mercilessly. Perhaps it has done its overshooting and is due for a bounce. If so, it is certainly at the "right" spot for it.

Then again, in an environment in which many indexes and stocks are being sold off beyond where they "should" bounce, there is always short-term washout risk.

________