Follow the Bulls South of the Border

by Tyler Craig | April 8, 2013 8:46 am

Despite widespread weakness outside the U.S., some isolated pockets of strength remain. The iShares Mexico Capped Index Fund (NYSE:EWW[1]) in particular has held up like a champ while many other country-based funds have faltered.

EWW is comprised of a broad swath of companies with heavy exposure to Mexico’s economy. Its components range from small- to large-cap and represent a handful of sectors, with the most concentration in consumer staples.

Unlike many geography ETFs, EWW boasts a large amount of trading volume, averaging more than 3 million shares per day. This bounteous liquidity spills into the options market, allowing EWW to offer a wide variety of strike prices with narrow bid-ask spreads.

Click to Enlarge As shown in the accompanying chart, EWW has exhibited a strong positive correlation with the S&P 500. While many regions — such as China and Europe — and emerging markets as a whole have notably diverged[2] from the U.S. this year, Mexico has not. What’s more, the iShares Mexico fund actually has begun outperforming the S&P 500. The bottom panel in the chart displays a ratio of EWW vs. the S&P 500. Notice the bullish reversal in the ratio showing EWW’s return to outperformance in late March (green arrow).

Click to Enlarge If we take a more detailed view of EWW using a candlestick chart, a few more alluring developments become apparent.

The fund recently completed a classic double-bottom at the $70 support zone and has climbed back above its 20- and 50-day moving averages. With its short-term uptrend back and intact, the path of least resistance is now higher. An upside target can be generated by focusing on the double-bottom formation. The measured move, or target, for the setup is found by adding the height of the pattern ($3.25) to the resistance area it broke out of ($73.25). At $76.50, the price projection offers enough upside to make the current pullback in EWW an attractive opportunity.

What’s more, Friday’s strong bullish reversal candle revealed that dip buyers are still alive and well.

To exploit a continued rise, you could purchase the June 74-77 call spread by buying the June 74 call and selling the June 77 call for a net debit of $1.29. The max loss is limited to the initial $1.29 paid and will be incurred if EWW sits below $74 at June expiration. The max gain for the spread is the difference between strike prices minus the net debit, or $1.71, and will be captured if EWW sits above $77 at expiration.

By going out to June, you’re giving EWW plenty of time to stage the expected advance.

As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.

Source URL: https://investorplace.com/2013/04/follow-the-bulls-south-of-the-border/

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