The name Ibovespa stands for Bolsa de Valores do Estado de Sâo Paulo and is a total return index which means that capital appreciation/depreciation and reinvested dividends are accumulated to calculate the index value.
We've seen a very troubling picture being painted over the economy of Brazil over the past year or so with political instability causing protests calling for the resignation of president Dilma Rousseff. Added to this the commodities slump has exacerbated the country's woes as it is dependent on the sale of these goods to ensures a stable trade balance which hasn't been the case resulting in a depletion of foreign reserves, creating even more worry.
Some well known companies listed on the exchange and who also fall into the index is AB Inbev (the largest brewer in the world) , Petrobras (state controlled petroleum and gas company) and Vale SA (the third largest mining in the world). It's quite evident from the preceding two companies that the exchange is largely influenced by commodity producers so we expect that tone to come through in our analysis.
Monthly
The first thing that I noted when looking at the long term chart is how the price levels made a decent effort in breaking higher after the sudden drop off after the Financial Crisis. The immediate return to those levels provided for confidence going further which has had wider implication on the index. From 2011 commodities have been slowly grinding down and so has been the case here with a gradual series of lower highs and lower lows firmly in place.
The period between 2014 and 2015 was an interesting one where it seemed as if the downtrend had been broken after confirming this fact in late 2014 however a reversal in sentiment sent the index screaming back down to support found at 45 000. The price action during this period does resemble that of consolidation which proved true with the last ditch attempt to save face from the bulls ending in a less than impressive performance and forming the final phase of the bearish pattern of Head & Shoulders.
The price seemed to grind between the level of 45 000 for a number of months before becoming fully committal in December 2015, all but setting the stage for what could come in 2016. The fact that price was lying underneath the 50 SMA increased the chance that this pattern would work and also increases the likelihood that it will reach its target price of 30 000.
But there will be a fight put up first at 35 000 as there has been in years gone past with two occassions being used as support in its ascent to all time highs and then again when the Financial Crisis was in progress. The bulls found stable ground in this region and will likely defend the level with much vigour.
We are seemingly approaching that support and given that we've seen a move from roughly 55 000 to possibly 35 000, a move of that proportion would represent a drop of 35% and upwards. The smart money would be willing to feast on their profits while normalisation takes place and the bears once again readying themselves to continue the trend.
Overall I think it does highlight the difficulty we are going to find in emerging market economies this year and does show that we are far from the bottom , so a level of caution should be heeded if analysts begin to call the end of the drop. Keep in mind the highs and lows at all times and note any specific breakthroughs of either.
Weekly
The weekly confirms the belief that the selloff that is currently being experienced may have run its course and we could see the beginning of a pullback that would provide the opportunity to short the rally should it arise. The level of 44 000 will be important as that is the mark that has shifted sentiment into extreme pessimism with medium term bulls who resided there now being fully shaken out of position.
Price has diverged far away from the 50 SMA which adds impetus to perhaps seeing a resurgence from the bulls however we need to see a base being built and solid ground being made but assessing the general mood in global markets at present there is quite a bit of volatility lying around so it will be telling to see which side has the form to take things forwards.
That wraps up another edition of Travelling Technical, hopefully it was insightful and provided you with some ideas of what we could see in the weeks and months to come in the markets. If you have any questions you would like to send you can drop me an email at cadetrader@gmail.com, I value your input and new ideas that may help. Cheers for now folks!!
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