Brazil has had its fair share of upheaval in the last couple of years, in fact observing it all unfold has been akin to watching a 4-hour marathon of Eastenders endings, with each torrid plot twist leeching seamlessly into a new drama. You can read the latest from Glenn Greenwald via The Intercept here. So with all the disturbance, you would probably expect to see a stock market languishing at lows, but actually, the opposite is true as the IBovespa and EWZ have made cracking gains in the last year or so. 

(Click on image to enlarge)

EWZ WEEKLY

A lot of this can be attributed to the ousting of Worker’s Party president Dilma Rousseff, whose reign was seen as a drag on business activities in Brazil, and the installment of her pro-business replacement Michel Temer, but with this new government now under investigation for corruption should we expect these gains to vanish? We don’t think so. 

Our model looks at trader positioning relative to average volume and open interest for the timeframe in view, and in essence not only picks out the times at which the buyers are overpowering the sellers but also gives us an overbought/oversold range at which we can expect the trend to reverse. Typically when our indicator hits the top of the range we are looking for a high to form (and vice-versa), but sometimes we see the indicator embed and it is at these times we can see very rapid price movement. 

(Click on image to enlarge)

EWZ MONTHLY SIGNAL CHART

Above is the monthly EWZ chart, and you can clearly see that the indicator has now embedded to the upside. On the last 2 occasions, the indicator did this EWZ moved substantially higher over the next few months. Drilling down into the weekly timeframe shows that the indicator is towards the bottom of its range and showing signs of a turn already - very promising for a low either in place or about to form in the near term. 

(Click on image to enlarge)

EWZ WEEKLY SIGNAL CHART

One note of caution, however, and that is the effect of the US Dollar on emerging market equities, as when the dollar strengthens these countries tend to be put under pressure. We have the French elections looming so we need to keep one eye on the euro, as a Le Pen victory would likely cause a swift decline and by extension a rally in the dollar; and in fact a Macron victory is probably mostly priced in now and could well become a ‘sell the news’ type event anyway. 

Assuming we can overcome these obstacles and the dollar remains more or less range bound, Brazil has a real chance to breakout solidly above resistance, and in fact looking at our weekly and daily charts we can see that in addition to consolidating above the primary downtrend line formed from the 2009/10 stock market top, we are also just starting to poke out above immediate pennant resistance.

(Click on image to enlarge)

EWZ DAILY

The daily signal chart for EWZ is on a firm buy signal as of this moment, so we do have a chance for further gains in the short term leading into the French elections. What we are looking for now is the weekly timeframe indicator to turn higher by Friday’s close and confirm the bullish trend is in play once again. 

(Click on image to enlarge)

EWZ DAILY SIGNAL CHART

We have already taken a position, and we are currently in profit by a small amount. Our primary support level for EWZ is 36 so that is your risk (although should we start to break higher immediately your stop could be raised to 36.50), and if we do go on to break down below 36 we have intermediate support at 33.50-34.50, so assuming our trend indications remain bullish we would be looking to stop out of our current trade and re-buy at that level.  

The bigger picture targets remain upwards of 60; both from a measured move perspective for the huge inverse head and shoulders pattern that has formed, and from our analysis of gains made in prior times at which the monthly indicator embedded to the upside. The risk/reward ratio is therefore favourable for longs at this point regardless of your leaning in terms of price direction in the immediate term. If you do decide to take this trade on we wish you good luck. For those looking to access these charts for themselves, please consider trialling the service free for one week.