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November 11, 2014

Outlook of Dollar, China And Brazil

By  Sebastião Buck Tocalino - De Olho Na Bolsa

  • The Dollar Index is approaching two important and converging barriers for its recent uptrend.
  • The Shanghai Composite Index is also bordering the top of its channel.
  • Brazil lost a good chance at recent elections to recycle its unsuccessful policies and government.
  • But technical analysis may show some relief for optimism in Brazilian stocks and the EWZ ETF.

I started writing about stocks in 2005. But for years (when there were more reasons for optimism) I would only write letters to some professionals I knew and other people who were already dealing or flirting with the stock market. Those who read only the texts I published in the last few years, especially in regard to the Brazilian economy, may believe that I am a permanent bear. Nevertheless, 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! At least, it would seem to me that only a sadomasochistic pessimist with loads and loads of money to burn would insist on being part of any risky financial market. We only invest due to our motivation and expectations of positive economic reward! Investors are people generally optimistic. But the key word is "generally", since only a fool or a complete amateur is optimistic no matter what! In the long run, markets demand that participants anchor the majority of their expectations on unbiased and pragmatic diligence. The market is no 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 very lucky in the past. Limiting any losses is a basic and important notion for the investor who wants to grow his nest egg in the long term - and this cannot be neglected.

In a text written on June 16, I pointed that, despite my serious worries with global and key macroeconomic data for the years ahead, there were signs for some further improvement in markets. In the occasion I wrote that, the exchange traded fund EWZ for Brazilian stocks had closed at $49.64, while the S&P500 was at 1,936. Indeed, two and a half months later at $54.56 on September 3, EWZ showed a gain of 8.78%. And the S&P500 broke the level of 2,000 climbing close to 4%. In Brazilian currency (Real) the Ibovespa (Brazil's benchmark Index) moved 13.68% up in just those 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. From now on, what may we expect from Brazil, an emerging market that in the recent national elections (held in October) has surely lost a good chance for recycling its unsuccessful and (deservedly) criticized policies and leadership? Well, for that matter, let us take a peak at the charts below (all of them in weekly candlesticks):

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.

The Shanghai Composite Index is also bordering the top line of its channel. A downward channel in this case. Of course it could reverse its yet short-lived uptrend, keeping Chinese stocks at bay in its longer term downtrend. Should it break the channel though, China could provide many markets with a stronger impetus to dare new and higher levels. Brazilian stocks could use this extra help right now!

Of course the outcome for the charts above could be just the opposite... and that would be terrible for Brazilian and global markets. But since I really don't see a whole lot of improvement in the world's macroeconomic situation, I will choose to stick to the technical analysis. In the short and medium terms, it tends to be more helpful than most fundamentals.

The next four charts show the piercing of downtrend lines and the completion of the buyers remorse pullback (testing those ruptured lines from above, now as support lines). So there is a 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 in the US) 

American depository shares of Brazilian oil company 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 dating back from the subprime crisis in 2008.

American depository receipts of Brazilian mining company Vale

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 a ride must not forget to set their stop-loss triggers!

Reproduction of this article, in parts or in the whole, without reference to the author is prohibited.
Copyright © Sebastião Buck Tocalino - De Olho Na Bolsa (www.DeOlhoNaBolsa.com). All rights reserved.
Read more by Sebastiao B. Tocalino at www.deolhonabolsa.com

Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in EWZ, PBR, ITUB over the next 72 hours. The author wrote this article himself, and it expresses his own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

DISCLAIMER: Any opinions expressed by the author may be personal and cotroversial. This is not an investment recommendation! This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by De Olho Na Bolsa in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter.  All data used and shown here were gathered from accredited sources that we believe to be trustworthy, reputable and accessible to market participants. 

De Olho Na Bolsa expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing. INVESTMENT DECISIONS INVOLVE RISKS! For your safety we suggest you should seek the professional advice and guidance of a reputable brokerage firm and portfolio manager. 

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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Item Reviewed: Outlook of Dollar, China And Brazil Rating: 5 Reviewed By: Econ Matters