Earlier this week, the iShares MSCI Brazil ETF (EWZ) tested its October, 2023 low. This test of support stopped just short of a 20% correction from the last high set on December 19, 2023. At the closing low, EWZ reached an 18.3% pullback from that last high. I decided to pull an early trigger on the 20% rule for buying EWZ for three key reasons:
- Partially thanks to this week’s rate cuts from the Bank of Canada (BoC) and the European Central Bank (ECB), financial markets are sniffing out the start of a global rate cut cycle. These rate cuts tend to support commodity prices and risk-seeking in emerging markets. Brazil checks off on both.
- The October lows provide a natural point of support for buying EWZ.
- I learned a lasting lesson from passing over buying NVIDIA Corporation (NVDA) because its steep one-day sell-off on April 19, 2024 came $6 short of my $750 buy target. NVDA closed today at $1209.98.
If EWZ continues lower from here, I will buy at least one more time at the exact point of the 20% correction.
My 20% rule for buying EWZ is a short-term (or swing) trade. Note well, EWZ traded around $61 (not adjusted for dividends) around the time when I first formalized this rule in 2010. This time around, a declining 50-day moving average (DMA) may define the ceiling for this recent trade. However, if the Federal Reserve surprises markets with a rate cut next week or even rolls out a specific timetable for a rate cut, I fully expect EWZ to eventually log a 50DMA breakout and continue rallying.
The chart above shows an important breakout for the the iShares 20+ Year Treasury Bond ETF (TLT). A higher TLT means lower rates, so the breakout, combined with the higher low, suggests that rates will start to trend lower from here. Given the stock market’s giddy anticipation of Fed rate cuts at some point, I bought TLT puts into this pop as a small hedge against other bullish trades.
Be careful out there!
Full disclosure: long EWZ, long TLT puts, long NVDA call diagonal