The Brazilian stock market took a major hit on Thursday as serious allegations against President Michel Temer arose. The U.S. traded proxy — iShares MSCI Brazil Index (ETF) (NYSEARCA:EWZ) — sank 16% in a single day.
Less than a year ago, former President Dilma Rousseff was removed from office thanks to a scandal of her own — manipulating the budget — and the tumult leading up to that event had many investors hitting the sell button on EWZ before asking questions.
But given Thursday’s price action in the EWZ ETF, active investors and others who want to take a structurally more positive view on the Brazilian stock market now have a well-defined pattern to take a stab at.
The removal of a country’s president can be demoralizing for the population of a country.
The possible removal of two presidents back-to-back is an entirely different animal, not just in mood but in investor appetite.
As such, when news hit that current Brazilian President Michel Temer was accused of paying a bribe to silence Eduardo Cunha — the mastermind behind last year’s impeachment of Rousseff — no one should’ve been surprised by investors’ “shoot from the hip” reaction in EWZ.
But this isn’t a political column; it’s a trading column. And we try to profit from the near- to intermediate-term opportunities and stocks and exchange-traded funds (ETFs). So I’d prefer to dig into the price action on the charts, and see what they’re telling us rather than regurgitate political theories.
EWZ ETF Charts
On the multiyear chart, we see that after topping out in 2008, this fund of Brazilian stocks dropped sharply during the global financial crisis. By 2011, it had recovered only to create a major lower high in price.
The downtrend since (black diagonal) is well-defined.
Earlier this year, the EWZ ETF broke decisively above this diagonal line of resistance, which also coincided with a break back above the 200-week simple moving average (red). Thursday’s flush in the fund brought it right back down to this former area of resistance.
All else being equal, this might be the all-important retest the chart needed before heading back higher.
On the daily chart, we see that Thursday’s price action cleanly broke the EWZ below its intermediate-term moving averages (including the red 200-day SMA), as well as below the uptrending channel (purple-dotted parallels). This drop came on a massive spike in volume (166 million shares).
Tactically speaking, I don’t like to gun-sling my way into a chart like this. Especially not with a blind “hold your breath and buy the dip” strategy. But on the chart, we also see that a possible area of support comes in closer to the $30 level. This level is made up of former horizontal support from last November and December, as well as a 50% retracement of the entire really from early 2016 into the February highs.
As such, in the coming days I’ll be looking to slip into a starter long position in the EWZ ETF if and when it hits the $30-$31 area. Then, we would look to see if this area can hold as support on a multiweek basis. If so, the fund should slowly start pushing higher again in the coming months.
Alternatively, traders could consider selling out-of-the-money put spreads (bull put spreads) considering the spike in volatility. If you’re really aggressive, you could even buy a little of the levered Brazil ETF, the Direxion MSCI Brazil Bull 3X ETF (NYSEARCA:BRZU).
An initial near-term profit target for EWZ would be back up in the high $30s. Any prolonged push below the $30 area would be a stop-loss ares. Remember: You can always get back into a position if the ETF starts acting better again. This beats holding on to losing trades and depleting financial and emotional capital.
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Source: Investor Place