Prior to Thursday's auction, I'd wager to say 95% of traders had never heard of Brazilian President Michel Temer. Let's be honest, most of us barely have the time to keep up with the silliness that occurs in our own government, let alone in that of Brazil. But all that changed when traders flipped on their screens to find the iShares MSCI Brazil Fund ETF (EWZ) trading 18% beneath Wednesday's closing print.
Without turning this note into a discussion on Brazilian politics, just know President Temer is accused of bribery. As a result, every stock associated with Brazil opened dramatically lower. And we're not talking about small-cap stocks. Names like Banco Bradesco (BBD) , Banco Santander Brazil (BSBR) , Petroleo Brasileiro (PBR) , Telefonica Brasil (VIV) , Ambev (ABEV) and Gollinhas Aereas Inteligentes (GOL) all lost between 12% and 25% on the day. Even the EWZ, an incredibly popular ETF among traders, lost more than 16%.
Rather than dig into every name individually, I'd like to comment on EWZ since that's the name I received the most emails about.
Over a higher timeframe, there's no question Thursday's decline knocked this stock down hard. Whether it's down for a few months or something far worse, such as a prolonged bear market, is likely a question of how aggressive buyers become between $29 and $31 (approximate levels are noted on the chart above).
One approach to buying the current dip would be to get long anywhere within Thursday's range, using a weekly close beneath $31 as your stop. Given the number of times price bounced off the low $30s between early August and mid-December 2016, selling the stock beneath that area would seem to make sense.
Another approach, and the one I'm more likely to follow, would be to wait for our shorter timeframe moving averages to catch up with price, and then wait for the ETF to close above a 21-day exponential moving average. If such a scenario were to set up from above the 200-day simple moving average, perhaps higher timeframe buyers will return to the party. Otherwise, the trade might be nothing more than a quick flip into an intermediate or higher timeframe moving average before ultimately rolling even lower.
In Thursday's note we highlighted 2372.50 on the E-Mini S&P 500 futures (Es) and suggested that level represented the very best bulls could probably hope for during the day timeframe. As you'll recall, 2372.50 represented both Wednesday's volume point of control (VPOC/Value) and a complete retracement of that session's afternoon decline. Back-testing that figure, while impressive in my eyes, fell into the range of logical expectations for a day-after rebound situation. Seeing demand evaporate the second traders tried to bid prices beyond 2372.50 was a clear indication the coast wasn't yet clear.
Moving on to Friday's Es auction, we'll end the week with an initial focus on 2363.75 to 2364.50, and overall expectation for continued selling into any intraday rallies. An open above 2363.75 to 2364.50 that holds the opening print has the potential to re-test the mid-2370s. But like we saw when buyers tried to press their bets beyond 2372.50, I'd expect a push beyond the mid-2370s to be faded (sold into).
If I'm wrong and demand follows price above 2375.25, the potential exists for a continued drive toward 2379.75 and 2385.25. And for those interested in such things, 2385.25 represents composite value for all trading between April 25 and May 17.
A failed trade from 2363.75 initially doesn't lead to all that much. Likely just two-way rotation between it and 2358.25. In time, though, as it becomes clear price can't recapture the session's developing volume weighted average price (VWAP), we'd begin looking for bearish continuation toward 2352.50 and 2346.75.
Any trading or volume profile related questions can be posted in the comments section below, emailed to me at email@example.com or posted to my twitter feed @ByrneRWS