Monday's headline event had nothing at all to do with the US markets. The big news of the day was Aecio Neves' second place finish in the first round of the Brazilian elections, behind current president Dilma Rousseff. Rousseff captured 42% of the vote, while Neves received 34%. More importantly, the fact that Rousseff failed to secure more than 50% of the vote pushes the two candidates into a runoff election.
For those unfamiliar with the two candidates, President Rousseff is from the left-wing Workers' Party. Neves, a pro-business centrist, is generally thought to be a great change for those currently invested in Brazilian equities. The runoff election is scheduled for Oct. 26, and the bottom line is equity holders want to see Neves emerge the victor.
The five main Brazilian stocks to watch are Banco do Brasil (BDORY), Petrobras (PBR), Vale (VALE), Centrais Electricas (EBR), and of course, the iShares MSCI Brazil Capped ETF (EWZ). I don't currently have any exposure to Brazil, but of the names listed, I am most interested in owning Petrobras. Just remember, should Rousseff win the Oct. 26 runoff, you'll likely enter the session with quite a bit of red on your screen.
Moving on to the major indices, Monday's session was a letdown for the bulls, as all four of our primary ETFs reversed lower as they tested their short term downtrend lines. Even worse, the iShares Russell 2000 ETF (IWM), the index that's been most aggressively sold over the past three months, finished the session notably weaker than any of the other three ETFs.
As you review the chart above, please note that aside from the SPDR Dow Jones Industrial Average (DIA), all ETFs are currently closing beneath their 50-day simple moving averages. And as far as the Relative Strength Index (RSI) is concerned, all four ETFs have RSI readings under the 50-center line. From an intermediate timeframe perspective, all indices remain in correction mode.
As far as Tuesday's E-Mini S&P 500 Futures (Es) auction is concerned, very little needs to be changed from Monday's trade plan. We'll begin the session with a focus on 1968.50 -- 1971 and 1946.75. And our baseline expectation will be for rotational trading between those areas (1971 and 1946.75), until a more pronounced shift in value occurs.
In the event value shifts above 1971, short sellers will want to proceed with caution, as the odds would immediately favor upside extension toward 1979.75 and 1986.25. From a higher timeframe perspective, it's important to remember that the intermediate term trend begins to improve as prices are accepted above the low-1970s.
Failure to hold the line near 1946.75 opens the door for a more aggressive seller to hammer the contract down through 1939.75, and into 1933. Day timeframe scalpers should be on the lookout for dip buyers testing the waters (again) against the low-1930s. That said, failure to bounce and recapture 1939.75 would likely have me looking for new swing lows.
Any trading or volume profile related questions can be posted in the comments section below, emailed to me at firstname.lastname@example.org or posted to my twitter feed @ByrneRWS.