Emerging markets have been one of the hardest hit areas this year, with Brazil taking the brunt of it, but the charts may be signaling a recovery for traders to play this spring.
At the March 24 closing, Profit Scanner powered by Recognia identified two intermediate-term bullish patterns in the Direxion Daily Brazil Bull 3X Shares ETF (BRZU): a Megaphone Bottom and a Double Bottom. BRZU is correlated to the performance of the MSCI Brazil 25/50 Index and is designed to measure the performance of the large- and mid-cap segments of Brazil’s equity market.
Generally speaking, intermediate-term patterns are expected to play out in 6 weeks to 9 months, but the anticipated resolution for the Megaphone Bottom is 27 trading days, and for the Double Bottom it’s 42 trading days. Let’s look at how each pattern should play out with upside targets.
Megaphone Bottom
According to Recognia, with a Megaphone Bottom, the recent broadening action tells market players that trading has been out of control, but a breakout on the upside suggests a more decisive uptrend is emerging. With its broadening price swings, the Megaphone represents a market that’s unstable and out of control. It typically consists of two successively higher highs between three lower lows, and the reversal signal occurs when the price breaks up above the second peak (the highest high shown in the chart above) as a sign of a more decisive bullish move.
With BRZU closing March 24 at $16.22, the Megaphone Bottom puts an intermediate-term price target of $18.60 to $19.20 for the ETF, again, in approximately 27 trading days.
Double Bottom
When a Double Bottom emerges, price seems to have reached a bottom after failing to break through a support level and ultimately rising higher in a sign of reversal to a new uptrend Recognia notes. The Double Bottom pattern forms during a downtrend as the price reaches two distinct lows at roughly the same price level. Volume reflects a weakening of the downward pressure, tending to diminish as the pattern forms, with some pickup at each low, less on the second low. Finally the price breaks upward above the highest high to confirm the bullish signal.
With BRZU closing March 24 at $16.22, the Double Bottom puts an intermediate-term price target of $19.00 to $19.80for the ETF, again, in approximately 42 trading days.
BRZU is a leveraged instrument at 3X, so it is, by nature, more volatile – as are emerging markets in general. Keep this in mind when determining position sizing. And remember that technical analysis is just one tool that traders can use. Particularly from a long-term perspective technical analysis may not be suitable for niche products such as leveraged and inverse ETFs.
While the power of leveraged instruments can be quite explosive, only invest if you are confident the product can help you meet your investment objectives and you are knowledgeable and comfortable with the risks associated with these specialized ETFs.
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