Wall Street struggled to rise yesterday, as Goldman Sachs’s poor earnings coupled with discouraging housing data– which showed a 4% decrease in housing starts for December– sent markets tumbling in Wednesday trading. Surprisingly enough Apple once again reported a stellar quarter, blowing away analyst expectations, however, the stock struggled to trade higher as it has in the past. Meanwhile, commodity markets finished mixed as crude oil and gold were nearly flat for the session as well, while Treasurys crept higher amidst all the pessimism in the American market.
With this uncertain economic environment, many investors have looked towards emerging markets for more growth opportunities. One popular choice has been the nation of Brazil, however, a recent bout with inflation has forced the country to consider raising rates at this month’s central bank meeting. As a result, today’s ETF chart to watch is the iShares MSCI Brazil Index (EWZ), which is currently trading at noteworthy levels from a technical perspective. The fund tracks the MSCI Brazil Index, which measures the performance of the Brazilian equity market [see EWZ Holdings]. EWZ is incredibly popular and it sees tremendous volume; it trades on average well over 15 million shares a day and it also has an extremely liquid options market. The fund’s popularity and liquidity make it an excellent trading tool favored by many day traders and momentum traders, all factors which make it an ideal candidate for chart analysis using popular technical tools.
It’s generally a good idea to start big and then zoom in when engaging in chart analysis. This way you have a better idea of where the security currently is trading at, relative to any significant historical price levels. When we look at EWZ’s trading history from a long-term perspective, its monthly chart shows that following the fund’s sell-off in the second half of 2008, it struggled to break above the $80 level in December of 2009. In fact, if we draw a Fibonacci Retracement from the time the fund’s monthly momentum reversed from oversold conditions in the start of 2009 until the peak in December of that same year, we can see it retraced nicely to the 38.2% level near $60 a share [see Fibonacci Explained With CORN ETF]. EWZ resumed its long-term uptrend in May of 2010, until hitting recent resistance at the $81.77 mark. Considering that EWZ failed to break above the $80 level in 2009, it is important to recognize that it might be due for a healthy correction once again, before it is able to march higher and set new highs.
When we consider EWZ’s daily chart from 2010 until today, it is clear that the fund has struggled to continue its steep climb upwards. After hitting $81.77 last November, EWZ has been range-bound with a downward bias. The fund has had two failed attempts to regain the $80 mark since its peak, and currently its daily stochastic momentum index has yet to hit oversold conditions, suggesting that further downside is reasonable to expect. Another popular indicator is the 200-day simple moving average (blue line), and it is mostly commonly used to gauge long-term trends as well as predict support levels in uptrends and resistance levels in downtrends. In the daily graph we see that EWZ has had a solid uptrend from $57.18 a share all the way up to $81.77 a share. If we are conservative in our analysis and draw a Fibonacci Retracement from the start to the end of the last uptrend, we get projected price levels that EWZ is likely to retrace to. Furthermore, the fund’s tendency to retreat towards its 200-day moving average following a sizeable uptrend should also be considered as a sign of caution.
Given that EWZ is trading at a historically significant price level, since its last correction was after its $80 dollar peak, and the fact that it’s monthly and daily momentum are showing signs of weakness, its likely that EWZ needs to come down further before resuming its longer-term uptrend. If we are conservative in our analysis we can expect for EWZ to retrace to the 38.2% level as it did following its previous peak, around $72 a share, which happens to be very close to the fund’s 200-day moving average as well. It is quite possible that EWZ is slowly building support around the $75 level and setting up for a break-out above the $80 mark, however, traders and investors alike are advised to be cautious and consider waiting for EWZ to come down near the $70-$75 level before establishing long positions [also see Emerging Market ETF Investing: Seven Factors Every Investor Must Consider].
By far the most important thing to remember is to exercise caution when trading, especially when using technical analysis. In addition to being conservative with your analysis, remember the importance of using stop-loss orders and observing disciplined profit taking techniques.
Disclosure: Stoyan holds February Put contracts for EWZ.