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.

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.

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/insurance), 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.

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:

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.  S. 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!