Brazil is in the middle of a very serious political crisis along with a terrtible economic situation. Yet the weekly chart of the iShares MSCI Brazil Index (ETF) (NYSEARCA:EWZ) shows prices have moved through key resistance. Does this mean it’s time to start nibbling at this ETF?

Let’s start with the positve by looking at the weekly chart of the EWZ:

There are two key bullish developments: prices breaking a downtrend that started in 3Q14 along with plenty of upside momentum “room to run.” The former indicates we’re seeing traders begin to take at least small positions in this ETF in anticipation of a rebound. Furthermore, the MACD indicates this ETF could rally to a considerable degree.

Now for the bad news: the country is in terrible shape. First of all, the current president faces impeachment. Other members of the government are embroiled in a very large corruption scandal and the judiciary is under popular fire. I make no predictions about the potential outcome. I only note this in a very large crisis that endangers the entire political culture.

Second, the economy is in terrible shape:


Taking the charts in top to bottom order:

  1. The economy has contracted for a year. Remember that the textbook definition of a depression is six consecutive quarters of contraction.
  2. Unemployment is increasing.
  3. Prices are rising,
  4. So the central bank increased interest rates to 14%, essentially slamming on the brakes to tame price increases.

Everyone wants to buy low and sell high. What they often forget in that equation is that in order to buy low, they typically have to take on a tremendous amount of risk. The Brazil ETF represents a tremendous opportunity but also a very high degree of the following types of risk: economic, inflationary and political.

Only take a position in the EWZ if you can lose every penny you in invest in the position. It could all go to hell tomorrow.

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