Brazilian Bovespa Sinks: Expect More Weakness in the Near Future

The global bear market has begun. For over a month, I have warned investors that markets were behaving poorly. Despite the fact that NASDAQ, S&P 500, Russell 3000, DAX, Hang Sang, and Bovespa all reached 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 that mirror that of Brazil. If we are witnessing synchronized head-and-shoulder tops, the future weeks will be full of action.

Comments

[prairiedog555:]

as goes Nat Resources so goes commodity Em Markets.

Jul 08 12:21 PM

[JPDX:]

You chartists are so retarded. Looking at a longer time period will show a much different story.

Jul 09 12:22 PM

[jayminho:]

the only short position i want to own is AIG. thats it.

Jul 09 12:35 PM

[donzelion:]

Sounds fair: I'll wait for the downtrend to go further before adding further to my Brazilian positions.

Jul 09 12:55 PM

[MarvinMBA:]

I think the USA downdrafts are causing other countries indexes to weaken but what is going to happen is the dislocation from the US economy is going to continue and Brazil and and the rest of the BRIC countries including Taiwan are eventually going to take off independent of the good old Stars and Stripes. The GROWTH IS NO LONGER IN THE USA, thats for sure so start investing into the emerging economies...I particularly like Taiwan Index ETF where it is starting to trade and mutually invest with China and Taiwan is protected by the USA...best of all worlds for an Asian investment...MarvinMBA

Jul 09 04:44 PM

[bigtime99:]

You don't want to be layering on shorts AFTER a 10% commodities-led correction, I'm afraid. That's stupid money.

Jul 09 08:54 PM