Stocks drifted higher on Tuesday following a positive home-builders confidence report along with better-than-expected earnings from Bank of America. The real story of the day, however, was the impressive last-hour rally on Wall Street, fueled one again by optimism over the euro zone debt situation. Stocks surged on high-volume just an hour before the closing bell after news that Germany and France had reached an agreement to end the crisis hit the street. The news report announced that Germany and France have reached an agreement on a €2 trillion rescue fund which is roughly five times bigger than the current bailout program, which looks to be more than enough to prop up most of the weakest members in the bloc. In after-hours trading, shares of Apple sank more than 5% after the iconic consumer-electronics manufacturer missed analyst earnings expectations. Gold prices sank down to $1,628 an ounce after the opening bell, although the previous metal quickly regained its lost ground throughout the day, settling near $1,660 an ounce.
The Central Bank of Brazil is scheduled to report its interest rate decision later today, which makes the ultra-popular iShares MSCI Brazil Index Fund (NYSEARCA:EWZ) our ETF to watch [see EWZ Holdings]. Despite the country’s high inflation rate, analysts are expecting the bank to cut the interest rate by a half-percentage point to 11.5%.
Since breaking below its 200-day moving average (yellow line) in early May of this year, EWZ entered a serious downward correction, shedding 30% between 5/5/2011 and 10/4/2011. This ETF has managed to climb nearly 14% since its recent low at $49.25 a share on 10/4/2011, which is not all that impressive considering that the fund is still down 25% year-to-date [see Alternatives To The 20 Most Popular ETFs]. EWZ does not appear to have bottomed out, seeing as how the fund has not yet tested support levels near its recent low around the $50 level [see EWZ Charts].
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Investors bullish on the Brazilian economy may be tempted to scoop up shares of EWZ on the cheap, however, this fund is still trading below its 200-day moving average which means its still considered to be in a downtrend. Despite the lucrative upside potential, going long EWZ at current levels is quite speculative seeing as how the next major level of support for this ETF comes in at $50 a share.
If the Central Bank of Brazil issues a fairly pessimistic or cautious commentary following the interest rate decision itself, EWZ may encounter downward pressure as investors look to sell out of this risky emerging market and re-allocate assets to safer large cap U.S. stocks. Likewise, if the central bank issues a surprisingly bullish outlook, EWZ could surge past the $60 level. In terms of downside, if EWZ does not hold support at the $55 level in the coming days, this ETF will very likely retest support around the $50 level. We advise conservative investors to stay away until shares of EWZ can establish definitive support above the $60 level for several consecutive days, perhaps even two weeks, depending on individual risk tolerance. As always, investors of all experience levels are advised to use stop-loss orders and practice disciplined profit taking techniques.
Disclosure: No positions at time of writing.
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