Year-to-date the iShares MSCI Brazil Index Fund ETF (ARCA:EWZ) is outpacing the S&P 500, and is still up more than 7.5% in 2014. Compare this to the S&P 500 SPDR (ARCA:SPY) which is flat on the year and Brazil looks pretty attractive. A longer-term chart shows Brazil in a long-term downtrend though, and strong selling on May 20 has created a short-term top which could be enough to kick-start another wave down. If that is the case, taking short positions in several Brazilian stocks may pay off in coming weeks.
iShares MSCI Brazil Index Fund had a very strong run higher in March, with another bump higher in early May. On May 20 the price fell 2.15% after nearing $50; on the longer-term chart $50 is a highly likely resistance point. While there is a chance the price could rally back above $50, there is a significant shorting opportunity here if the longer-term downtrend continues to unfold. A stop can be placed above the October high at $51.75 with an initial target near the March low at $40, followed by another target at $37 based on the long-term descending lows. A rally above $51.75 will create a long-term higher high, and signals the long-term downtrend is potentially over.
The rally in March and April pushed Banco Itau (NYSE:ITUB) above the November high indicating the bullish potential of the stock. That bullishness may be coming to an end. The price has climbed more than 30% since the March lows, but met resistance at $17, just below the March 2013 high at $17.34. This is the top of a price range which has been in place for nearly two-and-half years. If the price continues to decline below $16.50 that range is likely to stay in place, which would see the price decline back toward $13, and potentially $12 to $11.38--the range low area. With a stop above $17.34 the reward-to-risk is greater than 4:1.
Ambev S. A. (NYSE:ABEV) been in a declining range since March 2013. In 2014 the stock saw a bear market rally from February to late April, but the price is rolling over in this one as well. A gap lower in late April, a weak rally in early May and a 1.75% decline on May 20 makes the stock appear poised for another leg down. The target is $6.25 to $6.00 based on the long-term decline lows. A stop near $7.75 should be out of reach, but placing it at $8.00 avoids the potential of being pre-maturely stopped out before the downside move (but reduces the reward-to-risk ratio).
In April Vale S.A. (NYSE:VALE) was looking like it could reverse the long-term downtrend. The price had moved above the February high at $14.85, but since mid-April the price has fallen sharply, and in May has made a lower swing high and a lower swing low. If the price continues below $12.90 watch for a test of $12.30. Given the head-and-shoulders-like price action in 2014 a break below $12.30 could send the stock into single digits ($9.50) for the first time since 2008. A stop is placed above $14.25.
The Bottom Line
It appears these Brazilian stocks are rolling over and continuing the longer-term downtrend. Each stock provides its own opportunity on the short side with a different risk reward ratio. Shorting stocks is often considered more risky than buying stocks, but with a stop loss in place, shorting with a downtrend is no more risky than buying stocks during an uptrend. Losses can occur whether long or short. Position sizes should be aligned with account size so one loss significantly draws down account capital.