Chart Advisor: Analyzing Brazil ETF Rally

By John Salama, CMT

1/ Brazil Rallies, Faces Resistance

2/ Natural Gas Poised for Potential Fall

3/ Oil Set for Short-Term Decline

4/ Healthcare Hits New All Time Highs
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1/ Brazil Rallies, Faces Resistance

Courtesy of barchart

The Brazil ETF (EWZ) has emerged as one of the strongest performers, rebounding sharply from a 52-week low during the Japan crash on August 5th to gain 18% in just two weeks, averaging a 1.3% daily increase. This recent volatility surge and new three-month highs have brought EWZ within 1.9% of its declining 200-day moving average, currently at $31.53. The ETF peaked at $35.74 on December 19th and has since been making lower highs until breaking out above $29.50 last week.

Despite being oversold in June and briefly overbought last November, EWZ has struggled to maintain levels above the 200 DMA since April. I anticipate that EWZ will approach the 200 DMA before declining towards its 21-day exponential moving average at $28.74, which could represent a potential drop of about 7% over the next three weeks.

2/ Natural Gas Poised for Potential Fall

Courtesy of barchart

The Natural Gas Fund (UNG) has been a poor performer for years, with its fund operator even instituting a reverse split in January due to significant underperformance. I've often turned to this ETF for short opportunities because it consistently trends lower. Historically, October, January, May, and June have provided ideal selling points as the fund approaches new 52-week lows—most recently hitting $12.57 during the Japan crash two weeks ago. The 200-day moving average (200 DMA) currently acts as significant resistance at $18.15.

Over the past two weeks, UNG has surged 17%, a remarkable recovery from nearly oversold conditions, reaching a 52 RSI. For this summer, a 50 RSI has been the peak before a reversal lower. The 52-week high of $31.92 was set last October. UNG has experienced oversold conditions, particularly in December and February, and only briefly entered overbought territory for six days in May before facing rejection and subsequent decline.

Given the current market conditions, UNG appears poised for a relative strength sale and is likely to decline by about 16%, giving back all its gains since the Japan crash, and potentially reaching a new 52-week low around $12.40 over the next three weeks. This ETF tends to underperform regardless of market direction and remains out of favor with investors.

3/ Oil Set for Short-Term Decline

Courtesy of barchart

The US Oil Fund (USO) has remained largely range-bound since reaching its 52-week high of $83.41 in April, fluctuating between $70 and $83 for the past six months. The 200-day moving average (200 DMA) has provided significant support since January, with brief breakdowns typically lasting less than a week. Currently, the 200 DMA stands at $74.37, showing a slight decline. The 52-week low was $63.84, reached in December.

This year, USO has not experienced oversold conditions but has seen overbought periods, notably in September and briefly in April, driven by geopolitical concerns in the Middle East. Following a 10% rally from the Japan crash lows, the fund has given back about half of those gains. I anticipate USO will decline 4% to around $71 over the next three weeks, trading below its 200 DMA once again, which may frustrate investors and reinforce its range-bound pattern.

4/ Healthcare Hits New All Time Highs 

Courtesy of barchart

The S&P 500 Healthcare Sector SPDR (XLV) displays an impressive chart. Its recent performance suggests that market gains are not solely driven by the Artificial Intelligence boom. Rather, it could be a reflection of market expectations for lower future interest rates or a robust defensive play. XLV is one of the few sectors that has consistently achieved new all-time highs over the past week, including today.

After being oversold in October and April, XLV has rebounded strongly, spending significant time in overbought conditions during January and February. From January to July, it was confined to a 7% range between $138 and $148. The breakout above $148 in July was crucial for investors, although it briefly fell below this level during the Japan crash. However, XLV has since rebounded to new all-time highs, closing today at $153.90.

The 200-day moving average, which acts as a strong support level, currently sits at $141.82, about 8% below the current price. XLV has not closed below its 200 DMA since November, when it was out of favor with investors. While the ETF might have a modest upside of around 1% in the near term, I expect it will pull back to its 21-day exponential moving average at $149.73, representing a potential decline of about 2.5% over the next three weeks.

About this week's author

John Salama, CMT, is a Chartered Market Technician since 2021 with over 15 years of institutional derivatives experience. Currently, John is a proprietary trader who systematically utilizes technical analysis. He shares his expertise by broadcasting his trading process three days a week at market close on his YouTube channel, aiming to educate retail traders. He is also a regular interviewee for Business Insider.

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Originally posted on August 20th, 2024