The Brazilian stock market rallied strongly between January last year and May 2017. In less than 18 months, the Brazilian stock market ETF EWZ more than doubled. This week, however, the Brazilian stock market index crashed 17 percent, making it a very significant pullback in 2017.
How far can the Brazilian stock market fall in 2017, is the key question?
Interestingly, the chart provides clues about the answer to this question. The crash started right at a secular resistance level, as seen on the chart (purple circle).
The chart suggests that the Brazilian stock market remains in a bear market in 2017, so far at least. The recent rally was very impressive, but the bear market remains intact until proven otherwise.
The chart reveals that the bear market channels are strong in suggesting future price direction. In the last 10 years, EWZ has moved at least 95% of the time within its falling channel(s).
Because of that, there is a fairly high chance that EWZ will bounce at its center line at 26 points. That is some 20 percent below today’s levels.
Given that emerging markets are strong in 2017, coming close to a major trend reversal (from bear to bull market), we believe Brazilian stocks will fall a bit more until their drop stops.