Time To Buy EWZ? Think Again.

by on June 8, 2012 | ETFs Mentioned:

Slow and steady economic growth at home coupled with a looming debt crisis in the European currency bloc have promoted investors of all walks to seek out safe havens and uncorrelated returns amidst this uncertain backdrop. Many have turned to emerging markets in search of more lucrative growth potential, although uncertainties across developed markets have kept the lid on investors’ confidence. Brazilian equities in particular have endured a rough correction over the past few months, leading many to wonder whether or not this is a good bargain shopping opportunity to tap into the Latin American powerhouse [see also LatAm-Centric ETFdb Portfolio]. 

When it comes to Brazil ETFs, the iShares MSCI Brazil Index Fund (EWZ) easily takes the cake in terms of size and popularity; having launched in mid-2000 with nearly $7 billion in assets under management, investors and active traders alike have embraced this ETF as a means of accessing Brazil’s equity market. Given its recent multi-month correction, below we offer a technical analysis of this ultra-popular ETF, citing noteworthy levels of support and resistance that both traders and buy-and-hold investors who are considering a position ought to consider [see ETF Technical Trading FAQ]. 

Chart Analysis

Consider the 10-year Weekly chart for EWZ below. From a big-picture perspective, this ETF has come down to a historically significant support level; notice how EWZ previously kept afloat above the $50 level in early June of 2009 and most recently in early October of 2011. This ETF appears to be holding support once again near $50 a share, although caution should be exercised this time around seeing as how shifting fundamentals may take precedence over historical support levels [see also 3 ETF Trading Tips You Are Missing]. 

Click To Enlarge

Brazil has hit some major road bumps in the past few months as economic growth has cooled off considerably, leading many investors to jump ship from this previously red-hot Latin American powerhouse. For starters, Brazil’s latest GDP report disappointed investors as the figure came in at dismal 0.2%, falling short of estimates and marking the third consecutive quarter of slowing growth. Furthermore, the nation’s favorable demographic trends have recently been overshadowed by slowing investments and weakness in the labor and agriculture markets. Although Brazil has a host of homegrown problems, the slowdown in China, which is Brazil’s largest trading partner, coupled with looming threats from the Euro zone have also added to list of obstacles. 

EWZ is without a doubt in a “sweet spot” at the moment so to speak; this ETF is flirting with a major support level which makes establishing a long position very lucrative, although the overarching fundamentals paint a gloomier picture for Brazil’s economy. As such, we advise conservative, longer-term investors to hold off until this ETF is back above $60 a share. For those eager to bargain shop however, we advise monitoring your position as EWZ floats around $50 a share (blue line), seeing as how a break below this level could welcome intense selling pressures [see Five ETFs That Will Live Or Die By China].

Establishing a long position at current levels is also a bit speculative because the next level of major support doesn’t come in until $40 a share. In terms of upside, this ETF may face resistnace anywhere between the $60 and $70 levels, while major resistance doesn’t come in until $80 a share (red line). As always, investors of all experience levels are advised to use stop-loss orders and practice disciplined profit taking techniques.

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Disclosure: No positions at time of writing.