International relative strength as a double-top case study

The line under test

The historical workflow started with a relative-strength-line, the single comparative path of EFA versus a U.S. large-cap index, rather than with a basket of overseas tickers. That line was identified as forming a double top in May 2008 and September 2009.

After the second peak, the same EFA-versus-index relative-strength series was described as remaining in a long decline through March 2017. Those two peaks and the long path that followed are the archive facts this article keeps in view.

The completed double top

A double-top-bottom is a two-peak or two-trough reversal in price or relative strength that becomes a testable hypothesis once the intervening swing is broken. The archive identification of the May 2008 and September 2009 peaks supplies that two-peak structure on the relative-strength-line.

As an editorial reading, those peaks are a condition to keep or kill, not a completed leadership call. The hypothesis remains open until the intervening swing is broken, and it remains open again if a later recovery fails to hold.

Recovery as breakout or failed reversal

A later window beginning March 8, 2017 was used to show EFA leading the S&P 500 through much of that year and then lagging after mid-November. That is the archive description of the path after the long decline.

As an editorial reading, that later path is the second test on the same line. A breakout is acceptance beyond a stated swing level that confirms the chart hypothesis instead of treating the first tick as the signal. If the line is rejected, the same recovery can be read as a failed inverse head-and-shoulders, a three-swing reversal whose middle extreme is the head and whose neckline through the two intervening swings is the line that validates or kills the pattern.

Expanding the clock

A change in relative strength was to be watched first over one week, then over a few weeks, then over a month or more before treating leadership as having turned. Trend-change confirmation on that work used a 20-day moving average, RSI set to 9, and MACD settings of 12, 26, and 9.

That grouping is the confirmation-cluster: a short moving average plus a fast RSI and a standard MACD used together to ratify a change in leadership after the time horizon has already expanded. As an editorial reading, the cluster is applied only after the pattern hypothesis is already on the table and after the week-to-month clock has been respected. It does not replace the double-top-bottom, the head-and-shoulders neckline, or the breakout test.

What the substitute list is not

Five broad international equity ETFs, VEU, VXUS, IXUS, ACWX, and CWI, were compared with one another and with the S&P 500 on a shared window starting October 22, 2012. Broad international equity ETFs were described as highly correlated, with EFA versus VEA cited at 97.9 percent, implying similar price structure across those substitutes.

The 11 largest ex-U.S. ETFs by assets mixed total-stock, small-cap, real-estate, and fixed-income mandates, so the ticker list was not treated as a single chart-pattern universe. That restraint is how the historical workflow avoided composition-mismatch. Several large overseas tickers are not one pattern universe when they mix equity, small-cap, real-estate, and bond mandates.

As an editorial caution, currency-risk is extra path variance in unhedged overseas holdings that can distort a price-structure signal even when the local-market pattern is unchanged. High correlation among broad equity substitutes does not remove that extra variance from an unhedged relative-strength-line.