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06-Jul-09
Chart of the Day - The Bovespa (Brazilian Stock Market)
The global bear market has begun. For over a month, I have warned investors that markets were behaving poorly. Despite the NASDAQ, S&P 500, Russell 3000, DAX, Hang Sang, and Bovespa all reach annual highs during the first two weeks of June, the lagging indices caused concern. When we witness divergence, one of two things must happen. Either the weak indices will firm, move higher, and reflect the strength in other areas of the market, or the stronger parts of the market will succumb to weakness and fall. Typically, weakness overcomes strength.
During the past week, we have seen weakness reign supreme. A perfect example can be found by looking at a chart of the Brazilian Bovespa. Brazil is among the best performing markets this year. It has exhibited a powerful uptrend since December (black line) which resulted in a 60% gain in less than one year. That trend is now broken. Alone, the failure of a steep trendline would not turn me bearish. However, the head-and-shoulders top (red arrows) does. With Brazil having carved out such a pattern, the likelihood of new highs is remote while the possibility of a steep drop increases. Based on the chart, I expect weakness to continue with pricing falling toward 44,000 (red box). If I am incorrect, prices should better the recent high of 54,486. With these two price targets, we see an upside of 13% and a potential loss of 8%.
With the gains skewed in our favor, a short position is warranted and that is the action I took in both my weekly newsletter EPIC Insights and client accounts I manage. The easiest way for individual investors to short the Bovespa is via the iShares Brazil Index Fund (EWZ). Over coming days, I will be showing multiple charts the mirror that of Brazil. If we are witnessing synchronized head-and-shoulder tops, the future weeks will be full of action.
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