Last week, we talked about the divergence in the market between the soaring S&P 500 Index and the falling iShares FTSE China 25 Index Fund (FXI), China’s benchmark index. That divergence continues, but the decline in China isn’t the only emerging market displaying divergence with domestic markets.

If we look at emerging markets in the aggregate, we see that they’ve recently fallen below their 50-day moving average. The chart below of the iShares MSCI Emerging Market Index (EEM) -- a benchmark index for the emerging market space -- tells the tale of a market segment that’s lost a lot of steam since November.

Compare the EEM chart to the chart below of the S&P 500 SPDRs (SPY) and you clearly can see the divergence in action.

I think that two things are likely to happen here with respect to this divergence. First, we could get a pullback in SPY that brings this extended index back below its 50-day moving average, thereby bringing domestic stocks back in line with emerging markets. The other scenario is that we see EEM gather itself and climb back up to the bullish levels of SPY.

Of course, the one other scenario is that both SPY and EEM sell off sharply. I don’t suspect that this will happen, but I do want you to keep close watch on these two critical market segments. Doing so will give you the initial warning that you need to protect yourself if we do see this final scenario take shape.