Trading Brazil

                                Brazilian Chica Con Dinero

Putting the trade on in September, when I wrote about it, just didn’t feel right but I’ve continued to observe the price action.  I think we have a tradeable set-up now in Brazil.  Since topping out in late June, it’s down 33%.  The commodity euphoria has finally waned a bit, or rather other asset classes have moved to the forefront of investor minds (mainly tech again for now).  Couple this with a potential strengthening of the Real against the USD and we have a chance for the stock prices of Brazil’s largest companies to be re-rated in the short-term.

Observe the correlation for EWZ (green) price spikes vs the USD (light blue) weakening against the Real.

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This chart alone looks like a good enough set-up to allocate capital, but the Timing by TradeSmith forecast (purple line) just below shows there’s potential room for a bit more consolidation before an up-move.  But there is a definitive, tight correlation to the forecast line and actual ETF performance.  This might be the most successful forecast by TradeSmith’s software that I’ve analyzed.

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What that means for our trade is that we need to purchase a strike far enough out (theta) to give the hypothesis time to play out.  Volatility in this ETF is sharp.  Observe the wavy action, surfable swells if you will, of rallies and drawdowns in the chart.  It’s readily obvious.

Roughly half of the ETF is positioned in just 5 stocks, which are Vale (iron/coal/base metals), Petrobras (oil), Itau Unibanco (banking), Bank Bradesco (banking), and Ambev (beer).  I don’t need to know their prospects to determine if the set-up is worth a trade as potential movement in the Real can improve investor perceptions of them as EM investments.

In September, I thought that $34 might be a potential bottom but it was too early.  Still though, $34 represents an important price point.  Only now it is resistance instead of support.  $31.50 should be the first line of resistance, but once broken, it looks as if it could easily run up to $34.

EWZ Res-Supp 2

The indicator that I probably put the most stock in is also at a favorable place for an EWZ rally as it just crossed over its oscillator.  I’ve highlighted in cyan each crossover occurrence over the last few years.  Positive price action tends to confirm.

As I’ve mentioned countless times, I prefer weekly charts to guide my trading theses.  But for you daily enthusiasts, EWZ is displaying a nice clean breakout to recover it’s 50-day SMA.  Based on my analysis, the 200-day should be next.  Observe:

EWZ Daily

In any event, I suspect there are multiple opportunities amongst “emerging” markets such as Brazil as a result of potential weakness on the horizon for the USD.  The Republic of Samsung, I mean Korea, is showing similar action as observed in the EWY.

So watch the US dollar and place your bets accordingly on some international holiday speculations!

Options Markets Muting Signals

Now that the options markets are the tails that wags the dog, equity market signals are losing power.  Or at least temporarily losing efficacy.  It doesn’t feel like a permanent arbitraging away, but huge capital (regardless of source) knows how to use broker dealers and market makers to maintain a supportive stance for respective portfolios.

I’ve been analyzing plenty of signals that a trap door is set up just under the stock markets.  Amongst those signals is the clustering of Hindenburg Omens in the NASDAQ.  A single Omen rarely proves useful, but clusters have been consistently effective in communicating large sell-offs ahead of time.  Observe the following chart, courtesy of The Felder Report:

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Just based on the chart, one would think that a large drawdown is very close.  In the past couple of decades, any time we’ve seen clusters of the Omens in a single calendar year reach 13 or more, then it usually was a portent for a heavy risk-off period.

Subsequent to November’s OpEx, if large capital simply continues to allocate to higher strikes farther out on the calendar for the major indexes, then the signal the cluster is communicating could be totally dampened.

It simply hasn’t paid to be the least bit bearish, but it feels like we’re drawing closer and closer to a period in the markets where fear and option flows could feasibly create a perfect multi-year set-up for expert surfers of price action.

Looking out 10 years, my gut tells me that there are fair odds that markets won’t experience a single, long drawdown similar to the Tech Crash or the Great Financial Crisis.  Instead, we’ll experience rolling drawdowns (15% to 35%) through the 2020’s but with an overall upward tilt on a long-term price chart.

It’s just a theory.  The Final Arbiter will reveal its hand in time, but you might want to consider waxing up your board and getting a new wetsuit for the potential environment ahead this decade.

If Everybody’s Thinking Alike, then…

While September’s seasonality, OpEx, and 7th straight month without a 5% dip has speculators on edge, if all the big banks along with many other outlets and mediums are calling for a correction, then can the markets have one?

Of course.  Just enough time has to elapse since the calls of the last week for one to begin.  When speculators have forgotten about the chance for correction is when a 5% – 9% dip can do its thing.

In the meantime, here’s a couple of opportunities worth considering regardless of where larger markets go this month.

Cannabis could be establishing a base from which to provide a nice little reversal trade.  Let’s look at a weekly of MJ, the largest cannabis-themed ETF by AUM.

MJ Before Bell (9-13-2021)

MJ seems to be finding nice support here at $15.  If it can bounce here, then $21 looks like a solid resistance point.  Between those 2 price points in the shaded area above is a confluence of various charting overlays & indicators.  Should that bounce occur, there’s any number of ways to structure a trade within that range to take advantage.

The CAGR vector for revenues, margins, FCF, etc. across the MSOs is looking quite enticing.  If the trading gods can deliver some political magic with a positive announcement of some sort around legalization, then you never know how spicy a trade might get.

And from the intra-week YTD high established in the 2nd week of February, MJ is down over 50%.  Regardless of any wider market breadth issues, it seems like enough capital has fled the category and is ripe for capital to bounce back in.  Overhead supply looks heavy between $22 – $24 so I wouldn’t get too clever pushing a move at the top of that shaded area.

The other potential trade setting up is in once white-hot Brazil.  Heavy amounts of capital shifted into Brazil on the back of the commodity thesis earlier in 2021.  It’s been shaken out a bit as EWZ has corrected 20% (intra-week) since late June.

EWZ Before Bell (9-13-2021)

It’s easy to see that the yellow horizontal line represents an important price point for speculators.  And there’s a confluence of charty shit, yada, yada, including a couple of intra-week bounces with longish wicks established in the past 4 weeks.  The chart tells me that a bet on a 10% to potential 15%ish bounce might be in play.  That’s just based on price action, but geopolitics and FX may hold more sway.  Further assessment of risk is warranted, but a surf-able swell may be setting up.

Based on all the Wall St. banks jawboning about market weakness in the past 10 days, it appears the Fed is attempting to lubricate the transition into a tapering environment and get a little correction started.  Just have to control volatility as an asset class and steam can be released with relatively little pain.  But markets don’t work like that, right?  Trade accordingly.

Volatility Interpretation

Volatility is a tricky asset class.  At least for me.  I’m sure quantitative methodologies utilizing various derivatives make it easier for the more mathematically inclined, but I do with what I got.  Chart interpretation is definitely more art than science, and I wanted to share what could be a set-up for a short-term burst in risk-off sentiment.

VIX Weekly (8-31-2021)

We’re only two weeks removed from that spike in fear that got everyone’s under-garments in a bunch.  Since April, the last 4 times the VIX spiked up resulted in intra-week advances but never closing a week above that top channel line.

Price action across all markets says to me that there is a lot of FOMO and confusion, as evidenced by declining or negative breadth and sentiment readings with new highs across various asset classes.

In order for a proper selloff across multiple asset classes, I’d like to see the VIX close out the week above 20.  Not a bear here.  Just positioned accordingly for some short-term profit should things soon get a little sparky for a minute.

The Best Part of Waking Up

The Best Part of Waking Up Attention Grabber

Wow, what an ignition for coffee.  This all-important soft has shot up a rough 20% in three days as of today.  That’s smoking momentum.

Props to those who are grabbing or grabbed a piece of that squeeze.

However, capital is nervous these days.  One can feel it across multiple asset classes and sectors.  That general nervousness could cause capital to quickly shift out of coffee and into some other asset bearing a superior portfolio correlation.  The move this week feels like a firework as opposed to a rocket headed to the moon.

FinViz Daily ChartFinViz Coffee Daily (7-22-2021)

And fireworks fizzle out.  Now maybe this is a legitimate breakout.  Destination?  Moon.  I don’t identify as a commodity market expert in any futures category so there are definitely legitimate fundamentals factors that I’ve spent zero time assessing.

In fact, I don’t identify as an expert in anything.  I just like to surf the swells of extreme price action across various sectors and assets classes.  Simple as that.  Sometimes I win big.  Most times I lose small.  Just trying to net higher and higher.

Let’s zoom out to a monthly chart of coffee (FinViz Monthly with COT).  The blue circles below show every time the big-money, savvy traders get a bit out over their skis against the smart-money commercials.

FinViz Coffee Monthly (7-22-2021)

Over the last 16 years, it would’ve paid to heed this signal more often that not.  In 2010, it was a total bust during that commodity super bull coming out of the GFC.  But other than that, futures and options would’ve paid out nicely betting on a sharp change in trend.

I’m a simple man.  Simple mind.  Simple life.  Simple trading tactics, and Puts on the JO ETF could provide a solid reward to risk if a reversal is essentially imminent.

The spreads suck, but there’s enough liquidity.  If coffee is to see holders start grabbing profits just as fast as they’ve made them, then the zone highlighted in yellow below looks like a logical place to explore opportunities.

Stockcharts Coffee Weekly (7-22-2021)

Ideally, we’d like to see profit taking tomorrow (Friday 7/23/2021), in order to add a wick to the top of the current weekly candle.

Again, beware of that price action in 2010.  And the Great Mother asks you to kindly stop brewing your morning drug with single-use plastic pods.