Markets are reeling Friday, the big S&P 500 index selling off more than 2% in this afternoon’s session following another round of trade war escalation with China.

President Trump tweeted that he would order American companies to start looking for an alternative to China for manufacturing, a rebuttal to China’s State Council’s Customs Tariff Commission announcing that it would levy two batches of new tariffs effective next weekend and Dec. 15, respectively.

The trade war drama is surely far from over at this point.

As a consequence, it’s set to be another lousy week for the stock market – the fourth straight decline for the S&P, in fact.

But that only tells part of the story. Often, when volatility gets injected into the broad market, the technical picture can provide some crucial context. Namely, is the selling we’re experiencing here a good opportunity to be a buyer?

Or is the market looking ready to throw in the towel and point lower for the rest of 2019?

To figure out the most likely trajectory for the S&P from here, we’re turning to the charts for a technical look.

First, the good news. It doesn’t take a technical trading whiz to see that the S&P 500’s price trajectory continues to look extremely constructive here.

While there have been a couple of revisions to the S&P 500’s uptrend in the shorter-term, the longer-term trend from January remains intact here with a series of higher highs and lows.

In other words, we’re still very much in a “buy the dips market”.

Just as importantly, that uptrend gives us a clear do-not-cross line that would signal an end to the trend if violated. Right now, that level comes in right around 2,825 for the S&P 500. A material breach of that level means that downside risk in the market just ramped higher.

Until then, the trend is your friend.

That’s true in the much longer-term, too:

The chart above shows the weekly price action of the S&P 500 reaching all the way back to early 2013. The S&P’s price action has been near-linear over that stretch, with clearly-defined support connecting major lows of 2012, 2016, and 2018, and a return line at higher levels currently in play.

If the 2,825 level in the S&P were to get broken through, a test of primary support at around 2,550 becomes likely.

That’s more than 10% additional downside from here before the S&P 500’s long-term uptrend even gets tested.

Despite the trade war, recession fears, and headline risk galore, the stock market isn’t on the verge of collapse this summer – in fact, it’s not even waving a caution flag yet.

This may be another lousy week for the market, but the technical evidence points to more upside ahead for the broad market.

“Buy American” has been good investment advice for quite a while now. But some international stocks are finally starting to show signs of life again. 

U.S. equity markets have overwhelmingly outperformed the rest of the world for years. Over the last five years, the MSCI All Country Ex-U.S. Index has produced total returns of 11.05%. By comparison, the U.S.-focused S&P 500 has surged more than 69.5% over the same period.

Along the way, foreign stocks – namely emerging markets – have been a colossal value trap. While international markets have looked cheap by many valuation metrics relative to American stocks, they still manage to keep on getting cheaper.

That could be about to change – at least in one particular pocket of the ex-U.S. market.

To figure out what’s happening (and how to trade it) we’re turning to the chart for a technical look.

For starters, it’s important to bear in mind that while international stocks have been a quagmire for long-term investors, they’ve presented some tactical upside opportunities – especially in recent months.

We looked at a buyable opportunity in Brazil back in October 2018, when U.S. stocks were flagging. And again, at a broader group of emerging markets earlier this year. Both led to double-digit rallies in the short-run.

Now, a similar tactical play is shaping up in the iShares Core MSCI EAFE ETF IEFA, an exchange-traded fund that tracks stocks in Europe, Australasia, and the Far East.

IEFA has been in correction-mode lately, rolling over in early July and more recently consolidating sideways in a range just below $60. It’s that range that’s setting up the potential for a buy signal in this ETF right now.

IEFA is currently forming an inverse head-and-shoulders pattern, a bullish reversal setup that’s formed by a pair of swing lows that are separated by a deeper low. The buy signal comes on a breakout above the resistance level that identifies the top-side of the price range. For IEFA, that breakout level is currently right at $59.

That’s a significant level for another reason – it’s also the price level that defines the bottom of the uptrend that IEFA had been trading within for most of 2019. A breakout through that level also puts IEFA back in its uptrend, with plenty of upside room.

At a glance, IEFA’s price action looks particularly “gappy”. Those gaps are suspension gaps caused by off-hours trading on non-U.S. exchanges. They make IEFA look more volatile than it really is – but you can ignore them.

Finally, momentum, measured by 14-day RSI up at the top of IEFA’s price chart, adds some extra confidence to the potential for a reversal here – our momentum gauge managed to put in a higher low on each of the price swings in the pattern.

For IEFA, the buy signal comes on a meaningful breakout above $59. Wait for shares to catch a bid above that line in the sand before you jump into this trade. After that, it makes sense to keep a tight stop in place; if shares violate $57, then the pattern is broken and you don’t want to own it anymore.

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