Brazilian Equities Begin to Show Signs of Recovering

While it seems investors have been very U.S.-focused it seems there are some interesting setups that are taking place in some country-specific ETFs. What I’d like to look at today is the iShares Brazil ETF ($EWZ). Brazil has fallen about 40% from its September 2014 high. With the down trend the 50-day Moving Average has acted as good resistance on counter-trend rallies. While at the same time Momentum (RSI indicator) remained in a bearish range as sellers continued to apply pressure to the downside.

However, recently there has been an interesting setup created in the latest price action for $EWZ. Earlier this month price tested the December low and bounced higher. At this test of the prior low the Relative Strength Index (RSI) put in a higher low. This bullish divergence is a good sign for Brazil bulls. What I’ll be looking for next is to break out of the resistance near 58 on the RSI as a positive sign that momentum is strengthening.

The On Balance Volume (OBV) indicator also put in a positive divergence. This volume indicator simply adds and subtracts the number of shares traded based on whether that day’s price action was positive or negative. We can see that fewer shares were traded on the downside as price fell to test that Dec. level, meaning there was potentially less interest by traders to push shares lower during this re-test.

As price approaches it’s 50-day MA and it’s declining trend line, this could be a place for price to do battle. Bulls will want to push $EWZ above this trend line as well as the Moving Average and hopefully get a test and a break of the prior lower low of $38.

I’ll be watching the price action in Brazil and see if momentum and price are able to show some constructive signs in ending the current down trend.

Brazil

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

How I Measure Breadth & What It Says for Equities Right Now

On Wednesday I had a conversation with Urban Carmel and Jesse Felder about breadth. Urban and Jesse are both great follows on Twitter and write must-read blogs. Urban recently wrote a post about breadth divergences being noise. He showed a couple of charts of the Percentage of Stocks Above Their 50-day and 200-Day Moving Averages. While this is one way to measure breadth I don’t think it’s the most accurate and to Urban’s point, it can often be just noise. However, In my opinion not all measures of breadth are created equal and I wanted to show my preferred method…

Every couple of weeks I wrote a post titled Weekly Market Technical Outlook in which I show many of the same charts with updated analysis and commentary. One of those charts is of market breadth, specifically the Advance-Decline Line and the Percentage of Stocks Above Their 200-day Moving Average. As Urban pointed out, there can be quite a bit of whipsawing in the breadth measure involving the Moving Average. However, my preferred (and often discussed) way of looking at breadth is through the Advance-Decline Line.

The Advance-Decline Line is simply a cumulative number of the daily net number of stocks rising or falling. If more securities on a specified index were up one day then the A-D Line rises, and the oppose occurs when more securities decline. Now there are different versions of the A-D Line, the most commonly mentioned version looks at all traded securities on the New York Stock Exchange (NYSE). The issue with using this version is it gets muddled up with non-equity securities. This is why I prefer to look at just the Common Stock Only Advance-Decline Line for the NYSE as well as the S&P 500 A-D Line.

Both of these breadth indicators are shown on the chart below along with the S&P 500 index itself in the top panel. Since 2006 we have had just one negative divergence in the S&P 500 A-D Line and two negative divergences in the Common Stock Only version. A negative divergence occurs when an Index like the S&P 500 makes a higher high in price but this price action does not get confirmed by the indicator, as it makes a lower high. We saw this happen in 2007 in both of these measures of breadth and most recently momentarily in just the Common Stock Only A-D Line.

Breadth 07-15

Market peaks in an index are often led by the degradation of the underlying securities of the index itself. Many stocks are likely to already be in a bear market before the S&P 500 puts in its final peak. Is it possible to still have periods of increased volatility without a bearish divergence in breadth? Of course. We saw examples of that in 2010, 2011, and 2012. But none of these led to bear markets or protracted down turns.

No indicator or set of data is perfect and nothing acts as a crystal ball for the market. However, by understanding and using tools like breadth, we are able to have a better understanding of the ‘health’ of a market. Currently, we have both versions of the Advance-Decline Line tracking with the S&P 500 and are not showing warning signs of a protracted market decline. The bulls appear to still be in control.
Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

Are Regional Banks Getting Ready to Breakout?

The Financial Sector has had a rough start to 2015, down 2.39% and is the weakest of the nine S&P sectors. With rates continuing to fall traders have not been showing much love to the banks. With weakness can come interesting chart setups and I think one is developing within a sub-industry of the Financials sector – Regional Banks.

For the bulk of 2014 we saw Regional Banks ($KRE) trade in a range between $41 and $37. However, last week we saw a strong bounce in the banks, climbing 8.5%. This comes as price bounces off the 100-week Moving Average and we see a test of support in momentum.

Currently the Relative Strength Index (RSI) has been making lower highs while also staying above ‘oversold’ territory and in a somewhat of a bullish range. If buyers continue to step in then we could see the RSI indicator break out from its multi-week down trend.

When I look at an industry within a sector I like to track how that industry is performing relative to its sector as well as the sector to its major index. As Financials ($XLF) have been under-performing the S&P 500 ($SPY) for the last year and a half, Regional Banks ($KRE) have been unable to keep up with Financials. Since the start of 2015 Regional Banks have begun to outperform the Financial Sector. Is this an early sign that Financials will also in turn begin to have better performance themselves?

regional banks

While $KRE has been in trading range for a year, this consolidation is occurring after an up trend, which is a bullish characteristic and could lead to another leg higher for the industry as the up trend does in fact continue.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.