"I was wondering what your thoughts were of recent chart action this year based on the Asian regional and Global charts in the library (in particular the MSCI series) They look to me like the establishment of a downtrend (series of lower lows and lower highs).Perhaps a setup for a further advance later in the year?"

Eoin Treacy's view I was asked in an interview this morning how long the current uncoupling was likely to last and it got me thinking about just how much uncoupling we've actually seen. There is little doubt that many Asian and Latin American economies have returned to impressive growth rates fuelled by intra-emerging market trade and are now less sensitive to the travails of the USA and Europe. Stock markets have mirrored this divergence but the Wall Street leash effect remains a powerful factor despite the former's outperformance.

The MSCI World Free Index is for all intents and purposes a market cap weighted index so it is heavily skewed to the USA and Europe. It first encountered resistance near 300 in October and has been ranging around that level since - in what has been a marked loss of momentum following an impressive bounce from the 2009 lows. The Index pulled back from 300 again last week and needs to establish itself above that level to indicate demand has regained control. The MSCI World Ex-US Index and Ex-Japan have a similar chart patterns.

Bearish sentiment continues to hold sway, fuelled by the acceleration in government bond prices. Yields are rapidly approaching levels not seen since early 2009 and the assumption appears to be that stock markets have to follow a similar trajectory, but how likely is this? The clear momentum trade has been to back the government bond rally and this has sapped demand for equities, which have mostly been ranging. High yielding shares are gaining adherents as a result. (For more on this subject see below). The number of ultra bearish reports crossing my desk has increased substantially this week and is generally a contrarian signal so I am wary of becoming too bearish against this background.

We said on a number of occasions over the last month that indices needed to hold about half their gains from the July lows and the S&P is currently testing the 50% retracement level having pulled back from 1100. If it holds above or in the region of 1062 then the medium-term bullish outlook remains intact. If its pulls back below this week's lows the chances of a further retest of underlying trading will have increased. In descending order, 1050, 1000 and 940 are potential areas of support, the last of which would need to be taken out to negate the cyclical bull market hypothesis.

Some might argue that a 12.5% margin of error is too wide, but we need to have the humility to accept the reality provided by the marker and adjust our position size accordingly. The technical facts are that the S&P 500 has ample room to consolidate in a first step above the 2008 through early 2009 base while sustaining the medium-term bullish outlook. Arguably, it has been doing just that since October.

We define the Wall Street leash effect as when Wall Street is steady to rising it lets the leash out and liquidity flows to other markets. However, when Wall Street is contracting, the leash tightens and the flow of liquidity reverses for a while. Despite sentiment to the contrary, Wall Street has been relatively steady and other markets, particularly in Asia and Latin American have outperformed impressively. If Wall Street begins to take out the levels of potential support mentioned above, then we can conclude that the Wall Street leash effect has turned to a headwind for other markets.

The MSCI Emerging Markets Index has been rangebound since October, mostly between 900 and 1000 and has unwound its overbought condition relative to the 200-day MA. It has posted failed breaks in both directions, exemplifying the ongoing war between supply and demand and is currently testing the upper side of the range. It will need to sustain a move above 1050 to confirm a return to demand dominance. The MSCI Europe, Middle East & Africa Index (EMEA) has a relatively similar chart pattern.

The MSCI Europe, Australasia and Far East (EAFE) Index is heavily weighted by Japan (23.4%) and the UK (21.3%) and displays the progression of lower rally highs you mention in your email. These would need to be taken out, with a sustained move above 1540 to question potential for some additional downside. http://en.wikipedia.org/wiki/MSCI_EAFE

The MSCI Latin America Index has also been ranging for much of the last 10 months. Two competing forces are at play on the chart with a progression of lower rally highs since January pitted against a short-term progression of higher reaction lows since May. A sustained move below 3930 would be required to indicate that another medium-term lower high has been reached while a sustained move above 4300 would indicate demand has returned to medium-term dominance.

Against this background, the strength of the ASEAN region has been outstanding with a high degree of commonality across the Indonesian, Malaysian, Thai, Singaporean and Philippine as well as Korean, Sri Lankan and Indian markets. The ASEAN group excluding Singapore but including Sri Lanka is becoming increasingly overextended relative to the 200-day MA making the potential for a mean reversion reaction / consolidation increasingly likely. The rest are far less overextended and provided the progressions of higher reaction lows remain intact the medium-term upside can continue to be given the benefit of the doubt.