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Dollar, China And Brazil In The Short Or Medium Term

Sebastião Buck Tocalino,
November 9, 2014

I started writing about stocks in 2005. But for years (back when there were more reasons for optimism) I would only write letters to a few professionals and other people who were already dealing or flirting with the stock market. People who read only what I published in the last few years, especially in regard to the Brazilian economy, may get the impression that I am a permanent bear. I have a real problem understanding this notion of perma-bears... It seems almost obvious that the stock market is not a very likely place for permanent pessimists to hang around! Only a masochist, with loads of money to burn, would insist on taking part of a business which he believes to be endlessly cursed. We all know that selling short is an entirely different animal - a lot harder than being long in stocks. To short requires nerves of steel and huge optimism on the part of the pessimist (the whole thing is just funny if you think about it). Anyway, we only invest thanks to our motivation and expectations of positive economic reward! Investors are generally optimistic people. But the key word is "generally", since only a fool or an amateur is optimistic no matter what! In the long run, markets demand that its surviving participants anchor the majority of their expectations on unbiased and pragmatic diligence. The market is not a place for stubborn individuals. And those who may believe that to invest is to buy and hold stocks of a particular company through the years, until retirement comes, have definitely not been around long enough to learn an important lesson. Or else, they must have been just lucky in the past. Limiting the losses is a basic and important notion for any investor who wants to grow his nest egg in the long term - and this cannot be neglected.

In my text from June 16, I pointed that, despite my serious worries for the years ahead with some global and key macroeconomic data, there were signs for some further improvement in markets. In that occasion, shares of the iShares MSCI Brazil Capped Exchange Traded Fund (NYSEArca: EWZ) had closed at $49.64, while the S&P500 was at 1,936. Indeed, two and a half months later (at $54.00 on September the 3rd), EWZ shares showed a gain of 8.78% and the S&P500 broke the level of 2,000 climbing up some 3.77%. In Brazilian currency (Real) the Ibovespa (Brazil's benchmark index) moved up 13.68% in just 11 weeks.

After that, stocks showed increased volatility. The U.S. Dollar Index got choked throughout October, and now (at 87.64) it has reached a level untouched since June of 2010 (in the midst of the Eurozone crisis). Yes, October was a challenging month!

But that is history. At $40.98, EWZ has already lost 24% of its value since September's peak. From now on, what may we expect from Brazil, an emerging market that in the recent national elections (held in October) lost a great chance to recycle its uncanny and (internationally) criticized policies and leadership? Well, for that matter, let us take a peek at the charts below (all of them in weekly candlesticks):

Dollar Index

The Dollar Index is approaching two important and converging barriers for its recent uptrend: (1) the top edge of its upward channel and (2) the level of prior peaks from 2008 to 2010. If the Dollar bows down to the challenge, this may help the performance of some important Brazilian stocks.

Shanghai Se C Index - China stocks

The Shanghai Composite Index is also bordering the top line of its channel. A downward channel in this case. It also could reverse its short-lived uptrend, holding Chinese stocks at bay in its longer term downtrend. Nevertheless, should it break up the channel, China would provide many markets with some stronger impetus to dare new and higher levels. Brazilian stocks could certainly use the extra help right now!

Of course the outcome for the charts above could go just the opposite way... and that would be terrible for the Brazilian and global markets. But since I really don't see a whole lot of improvement in the world's macroeconomic perspectives, right now I am choosing to focus only on the technical analysis. In the short and medium terms, it tends to be more helpful than fundamentals.

The next four charts show some ruptured downtrend lines and the completion of the buyer's remorse pullback (testing those surpassed lines now for supporting ground). So there is a pretty good chance that we may see some further optimism in Brazilian stocks and ETFs.

Ibovespa (Brazil's benchmark stock index in its national currency) and EWZ (Brazilian stocks ETF)
Índice Ibovespa e EWZ (ETF de ações brasileiras em dólares


American depository receipts of Bank Itau Unibanco
ADRs do Itaú Unibanco


American depository shares of Brazilian oil company Petrobras
ADRs da Petrobras

American depositary receipts of the Brazilian blue chip mining company Vale have suffered terribly with the reduced price of iron ore, but it may find some support now in the intersection of its downward channel and the level of its lows from the subprime crisis in 2008.

American depository receipts of Brazilian mining company Vale
Índice Ibovespa e EWZ (ETF de ações brasileiras em dólares

In conclusion, we may see Brazil riding yet another wild round on the saddle of a BULL... That, of course, is while the BEAR hibernates!

Whoever is in for any ride must not forget to set their stop-loss triggers!


Copyright © Sebastião Buck Tocalino - All rights reserved.

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