Almost six months ago, I showed you how the noise of the media can mask great investment opportunities. It’s rare that you get a second chance, but that’s what’s happening with Brazil, specifically, the Brazilian stock market.
Yesterday, EWZ, the ETF for the Brazilian market dropped an astounding 16% on news of more political corruption. The headline from Zack’s summed it up:
Brazilian Stocks Plummet in Wake of Presidential Bribery Scandal
Last December, the media headlines also screamed that Brazil was in trouble, both politically and economically. Yet, EWZ, the ETF for the Brazilian market, had given a new entry signal in March, 2016 and was climbing to 52 week highs. The low for EWZ had been just under $17 in January, 2016.
Since that time, the price more than doubled and made a new high of $40.44 just this past Tuesday. And then the bottom dropped out yesterday.
Or so it seems. Yesterday’s drop of more than $6 per share was steep, but should that change anyone’s investment narrative? I don’t think so.
Yesterday’s plunge caused EWZ to break into the Stock State Indicator Yellow Zone. Yes, it was a large drop, but … the normal volatility of EWZ is currently greater than 29%! So even with a move of this magnitude, EWZ still has a long way to go before stopping out.
That’s the power of the Volatility Quotient. It lets you know how much volatility you should reasonably expect. A 16% drop in one day is not something to just ignore. But in the case Brazil, it’s not a move that should cause you to throw in the towel.
You can clearly see that in this SSI chart of EWZ …
In fact, it was as recent as late last year that EWZ experienced another sharp 16% correction over a short period of time. That’s the price of doing business in Brazil.
There are several reasons that I think this downward move was overblown. Yesterday’s move dropped EWZ towards the bottom of a strong area of support that has been in place for EWZ. The volume-at-price chart shows this support extends down almost to the $30 level.
My proprietary time-cycle forecasting chart also shows that we are very near a short-term bottom and the path of least resistance is to the upside. This upward move could extend into the first part of 2018.
Last week, I showed you that the emerging market economies have a positive correlation to the price of oil. This is especially true for Brazil. As oil has moved almost 10% higher from the recent low, this should help act as a floor to the price of EWZ.
The price of EWZ is about the same as when we first wrote about it in December. I believe that yesterday’s move was just about the noise. There was no new signal given and it is not close to stopping out.
The signals are telling me that this could be a good entry point for EWZ. The noise is giving us this second-chance opportunity.
Have a good weekend,
Richard Smith, PhD
CEO & Founder, TradeStops