Brazil Poised For A Breakout

Brazil has had its fair share of upheaval in the last couple of years, in fact observing it all unfold has been akin to watching a 4-hour marathon of Eastenders endings, with each torrid plot twist leeching seamlessly into a new drama. You can read the latest from Glenn Greenwald via The Intercept here. So with all the disturbance, you would probably expect to see a stock market languishing at lows, but actually, the opposite is true as the IBovespa and EWZ have made cracking gains in the last year or so. 

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A lot of this can be attributed to the ousting of Worker’s Party president Dilma Rousseff, whose reign was seen as a drag on business activities in Brazil, and the installment of her pro-business replacement Michel Temer, but with this new government now under investigation for corruption should we expect these gains to vanish? We don’t think so. 

Our model looks at trader positioning relative to average volume and open interest for the timeframe in view, and in essence not only picks out the times at which the buyers are overpowering the sellers but also gives us an overbought/oversold range at which we can expect the trend to reverse. Typically when our indicator hits the top of the range we are looking for a high to form (and vice-versa), but sometimes we see the indicator embed and it is at these times we can see very rapid price movement. 

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Above is the monthly EWZ chart, and you can clearly see that the indicator has now embedded to the upside. On the last 2 occasions, the indicator did this EWZ moved substantially higher over the next few months. Drilling down into the weekly timeframe shows that the indicator is towards the bottom of its range and showing signs of a turn already - very promising for a low either in place or about to form in the near term. 

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This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities ...

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