Brazil – Terra da Santa Cruz

The long term investment prospects for Brazil are exciting and are nicely detailed here.  What should pique investors interest is the potential for outsized profits as experienced in in the early-mid 2000’s where the price of the Brazilian market was up more than 1000%. As with all investments, being patient and finding attractive entry points can help maximize any opportunity.  Below is a weekly chart of Brazil showing price action since the bottom in 2009 until May of this year.   Hopefully it’s obvious the Brazilian market has been in a poor investment since 2011 as it has printed lower highs and lower lows. Being invested during this time has been a painful, losing proposition, as the Brazilian index has fallen more than 40%. As an investor, the further something falls the more I become interested because the greater the fall the greater the chance for a big snap back rally.  As always with investments who's price is falling, the question is always when does it become worthy of your investment dollar as we all would prefer not to be catching the proverbial knife.

As I have mentioned many times throughout the years, I find that weekly, oversold conditions with divergence creates the high probability for an attractive entry point. The Brazil ETF, EWZ, created that exact setup early this year. As you can see below highlighted with the red circles, price fell while momentum (upper RSI pane) increased.  That divergence was the first flag to get ready for a possible entry.  From the lower price low in February priced moved higher, eventually breaking above the blue down trending channel.   The final buy confirmation an investor would like to see came when volume (lowest pane) increased leading up the breakout. 

Switching to a daily chart and looking at price since the low created in February shows a great example of an uptrend, higher highs and higher lows. In addition since April, price has been nicely contained within the blue ascending channel. That is until the start of September where it broke out to the upside and then again last Friday where it broke down. The 10% decline over the last week and a half are tough for investors to stomach as you have seen profits quickly disappear. Other than to have a direct vision into the future it would have been nice to be warned ahead of time the chance for a breakdown was in the works in order to lock in profits.

The fact is there was ample warning you just needed to know where to look. The market provided 3 signals all which happened around the same time and provided an early opportunity to take evasive action.

1.       Price closed outside the Keltner channel (green band) for 3 consecutive days. This is a signal price has moved too far too fast and warns of a potential reversal ahead. What it doesn’t do is indicate how big that reversal will be.

2.       The highest candlestick on the breakout (highlighted within the red circle) and the ones just before and after formed a rare evening star (bearish) reversal pattern which was provided the 2nd confirmation of trouble ahead.

3.       Trendlines are important and as you can see price closed above the upper blue support/resistance trendline. A breakout can be either bullish or bearish you need further confirmation before acting on any break. And we got the confirmation we needed within the next 3 trading days. There is a very important maxim that states “from false breaks comes big moves” (in the opposite direction). This is a great example of that maxim as it played out exactly. Price broke out to the upside and then quickly reversed (false break) and fell hard.

4.       While not a warning sign, the big volume spike that occurred (reflected in the lower pane) is the greatest I could find over the last 5 years.

While I am always on the lookout for good investments that  have been oversold, there is nothing in the charts that says the "bottomz in" for this current decline. The markets could quickly change all that next week but for now I will personally be avoiding Land of the Holy Cross until further notice.