Brazil Stock Rally Facing Stiff Test
Up sharply off of its January lows, Brazil’s Bovespa Stock Index is challenging the down trendline stemming from its 2010 highs.
With the Rio Olympics fast approaching, speculation on the competitions is in full swing (e.g., will Brazil be able finish its venues in time or who will win the fight between Brazil and the Zika virus?). Outside of those questions – and the athletic competitions – there is another serious test underway in Brazil. After suffering a major (false, in hindsight) breakdown in January, the Brazilian stock market has been on a tear. If there was a global stock market competition for 2016, Brazil’s Bovespa would certainly be in medal contention, having climbed some 50% off its January lows. Presently, however, the post-January rally may be facing its stiffest hurdle yet.
If we rewind a bit first, we see that the Bovespa has been on a wild ride since the turn of the millennium. After an epic 750% rally from 2002 to 2008, the index got sliced by 60% in just 6 months, from May-October of 2008. It was able to hold in the vicinity of the 61.8% Fibonacci Retracement of the 2002-2008 rally, however. From there, it would recover 99% of its 2008 losses over the subsequent 2 years.
Since 2010, the Bovespa has been in a gradually down-sloping channel, albeit with substantive swings within the range. Since 2013, the range has been contained at its lower bound near the 61.8% Fibonacci Retracement of the 2008-2010 rally. Back in September, we dubbed the index “The Most Interesting Chart In The World”, as the major 5-year support was pitted against a potential head-&-shoulders pattern. Thus, the Bovespa seemed to be destined for a substantial move, up or down, based on the resolution of this battle.
As it turns out, big moves in both directions would unfold. First, at the beginning of the year, the Bovespa broke its support/Fibonacci Line/Neckline, leading to a 16% plunge in 3 weeks. That sharp and swift move lower would prove to be all the downside the index would see, however. By early March, the index had recovered the entire loss, prompting another “Most Interesting…” post as the Bovespa was challenging its breakdown area. We now know that the breakdown was a “false” one as it has spurred a further rally of almost 30%.
That brings us to the present where we find the Bovespa running into the Down trendline that has served as the upper bound of the aforementioned post-2010 down-sloping channel.
So will the trendline continue to serve as resistance on the Bovespa? Or will the index manage to continue its rally up through the line? Only time will tell. It certainly would not surprise to see the trendline at least act as temporary resistance as the Bovespa consolidates its recent gains. However, considering the magnitude of the false breakdown, it would not surprise us either to see it eventually break out above the trendline and put in a further extension to the rally. In fact, it is possible that a new cyclical bull market in Brazil has only just begun.
In the meantime, we’ll focus on the index’s reaction to the trendline here. And like early in the year, we may possibly see some shakeout in both directions before the dust settles. Thus, it may be more of a marathon than a sprint and, as such, it may take some time before the gold medal is awarded here.
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The commentary included in this blog is provided for informational purposes only. It does not constitute a recommendation to invest in any specific investment product or service. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.
