Key Lessons from the Brazil ETF Trade

Back in October, 2009 When Brazil won the 2016 Summer Olympics, I heralded the news as an opportunity to invest in a country that promised to grow faster than the United States. The iShares MSCI Brazil Capped (EWZ) never quite matched its peak from 2008 but managed to ride the wave of a post-recession, commodity boom into 2010/2011. After that, Brazil began an orderly multi-year tumble. Needless to say, Brazil severely disappointed.


The weekly view makes the downward trend in EWZ very clear.
The weekly view makes the downward trend in EWZ very clear.

Source: FreeStockCharts.com

As the Brazilian story unravelled, I switched gears to more short-term trading starting with an idea that came after Brazil reversed its post-Olympics gains: buy EWZ after a 20% pullback. I formalized this rule in May, 2010 after observing EWZ rally twice from 20% corrections and trading through them.

After 2011, I took a three-year hiatus. I bought the iShares MSCI Brazil Capped (EWZ) once more in October, 2014. My purchase came at a time when EWZ was tumbling toward the bottom of a multi-year downtrend channel. For the next 8 months, EWZ struggled with the bottom of that channel before finally breaking down on the way to prices last seen in late 2004. I stubbornly stuck to my position but failed to build on the position as the news from Brazil appeared so dire. From there to the Olympics, EWZ doubled, and I finally decided to take my loss.


EWZ enjoyed a roust recovery going into the Olympics off the 12-year low set in January.
EWZ enjoyed a roust recovery going into the Olympics off the 12-year low set in January.

Source: FreeStockCharts.com

The timing of my sale was not an accident. With the 2016 summer Olympics ending and a presidential impeachment process looming, I figured the good cheer could come to an end (almost like sell on the news). I waited for a full week to see whether momentum would resume. After observing the gyrations in the wake of the Economic Symposium at Jackson Hole, I decided it was a good time to sell. As the daily chart above shows, the Olympics is starting to look like a definitive peak in EWZ. At minimum, a retest of the bottom of the previous downward channel is likely in play.

I learned a major lesson from this experience. First of all, I left my EWZ position on “automatic” for far too long. I never re-examined my trading thesis and never even constructed a plan for adding more to the position to profit from what I should have concluded would be an eventual recovery. If I had, I could have even made money on the trade.

So now, I wait for the next 20% correction in EWZ from its last peak. Such a pullback would put the ETF at $28 and just below the bottom of the previous downward trend channel. My alerts are ready. Stay tuned.

Be careful out there!

Full disclosure: no positions

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