Brazilian ETF Showing Rare Diamond Pattern

By Bryan McCormick

The iShares MSCI Brazil Index (EWZ) has an interesting and relatively rare technical pattern -- a "diamond" top.

This is a bearish reversal pattern, which suggests we will see a downturn in the index. As we can see on the chart, the "diamond" shape is outlined with the yellow lines. The downside potential for the pattern, at a minimum, is to the $56 area, or roughly an additional 6 percent loss from current price at the $59 area. This objective is shown by the light blue line.

The pattern became active when price broke below the $60 area, and would become inactive if price moves back above that level.

While the downside may not seem that great a risk, there is something potentially more important going on here. The diamond shape in question is also an "island" pattern. Note that there was a gap up and a gap down on either side of the pattern, though the gap down was small.

The added bearish implication is that this is a major topping pattern, coming at the end of a very long run up from the low of March and of mid-July. The diamond pattern therefore may be more bearish than apparent. This could be a major reversal in progress after a "blow-off" top to the upside.

When the BRIC country indexes exhibit weakness, it can also have indirect bearish implications for U.S. stocks. When traders take money off the table in the higher growth areas, traditionally seen as riskier than U.S. assets, it can indicate a cessation of risk appetite. Rather than being just about Brazil's index, this could mean that a real corrective phase is getting underway more broadly after a very strong month of gains in markets around the world.

Comments

[Get$Real:]

What a joke! You have to be a total idiot to believe this kind of bullsh*t called "technical" analysis. I am better off reading my horoscope to make my investment decisions.

Aug 11 02:22 PM

[Richard Sch...:]

Get$sReal is right. Drivel.

Actually, I know someone who does all her investing with horoscope indicators, and she's donw quite well.

Aug 11 02:34 PM

[tc1:]

This is one area where i think fundamentals are more important than a rare technical "pattern."

And Brazil's fundamentals look really solid, as many analysts have noted. Massive commodity-assets for the export market and growing Brazil's own infrastructure, a growing middle class (much younger in age, on average, than our own US or western European or Japanese populations), with domestic purchasing power, a strong currency, and a president (Lula) who has found the right balance of pro-capitalist policies and social democratic programs to allow more and more of the previously impoverished masses to come into prosperity.

Aug 11 02:46 PM

[fg144331:]

I believe Get$Real, charting is crazy, maybe something for the
program traders, they can use the level II on the exchange and
know how many buy or sell orders there are and go from there.
They should BAN program trading, we should all do it the old
fashion way, then we are all equal. Eliminate the analysts they
do nothing but muddy the water.

Aug 11 04:41 PM

[taxed2much:]

"rare pattern" equates to the pattern rarely seen and thus not a solid pattern to consider anyway. Besides that, your diamond doesn't quite resemble a diamond does it? Try looking at it in other chart software. It's not even close to a diamond. Where did that chart software come from anyway? A personal theme you implement maybe? Hey fg, there's a reason the word analyst is spelled containing the word anal.

Aug 11 11:18 PM

[Gravity404:]

when I look closely, I also see pink hearts, blue moons and green clovers.

Always after me lucky charms!

Aug 12 09:48 AM

[Gravity404:]

I do agree with the last paragraph. I have taken some profits to reinvest after the correction getting ready to take place.

"It's time in the maket; not timing the market"

Aug 12 11:29 AM

[jambo:]

Yes this corrective phase could be getting underway and do a bit of short term damage to EWZ... BUT, what if the correction in US markets is substantial? Would this emerging market play look like a better haven than say the suffering buck?

Aug 14 02:49 PM