Brazil ETFs Run Into Resistance as Runoff Looms

Brazilians head back to the polls for an Oct. 28, 2018, second-round election runoff, where it's likely that they will vote in far-right populist Jair Bolsonaro as their next president. Bolsonaro is polarizing and confrontational, declaring to supporters Sunday that he'd purge the country of left-wing "criminals."

Despite the bravado, Bolsonaro has a significant task ahead of him, if elected. Brazil's gross domestic product (GDP), a measure of a country's economic growth, grew just 1% year over year as of August 2018 – analysts had expected an increase of 1.1%. Revamping economic policies, specifically reforming Brazil's pension system, which contributed to the country's deficit rising to 10% of GDP in 2015, is likely to be challenging for Bolsonaro as his polarizing politics may make it difficult to garner the necessary support to implement change.

Brazilian stocks have rallied over the past month as investors factor in a "market-friendly" Bolsonaro victory. Traders who think the election result may be a case of "sell on the news" should keep these three Brazilian exchange-traded funds (ETFs) on their radar. The first two ETFs below analyze crucial resistance levels, while the third fund provides a trading idea for those who wish to short the country's stocks.

Created back in 2000, the iShares MSCI Brazil Capped ETF is the largest pure-play Brazilian ETF and tracks the MSCI Brazil 25/50 Index. EWZ invests primarily in Brazilian large- and mid-capitalization sized firms. As of Oct. 24, 2018, the fund has a year-to-date (YTD) return of  -0.06% while returning 17.83% over the past month.

EWZ sold off sharply in the first half of 2018 – between late January and early June, the ETF fell 33%. The fund's price started to recover throughout July, before testing the June swing low in early September. Since that time, the price has rallied above the 200-day simple moving average (SMA). The ETF is likely to hit significant resistance at $41 from the downtrend line that extends back to January.

The VanEck Vectors Brazil Small-Cap ETF, formed in 2009, aims to provide similar returns to the MVIS Brazil Small-Cap Index. The fund's basket holds small-cap Brazilian companies that cover a broad spectrum of sectors. BRF has returned 18.39% over the past month and -13.82% YTD as of Oct. 24, 2018.

BRF's price has rallied sharply since hitting its YTD low of $15.93 on Sept. 14; however, the fund's price has failed to move above the 200-day SMA. This long-term moving average now spells double trouble as it provides a confluence of resistance with the downtrend line at the $21 area. If price moves into this level as the election nears, the relative strength index (RSI) will rise above 70 into overbought territory, increasing the probability of a reversal.

Created in 2009, the ProShares UltraShort MSCI Brazil Capped ETF seeks to return twice the daily inverse performance of the MSCI Brazil 25/50 Index. The fund has sufficient liquidity for traders, with an average daily trading volume (ADTV) of $6.27 million. BZQ's average daily spread is 0.13%, making the instrument more suited to swing trading rather than day trading. Management fees are moderate – the ETF's expense ratio of 0.95% is in line with the 0.94% category average.

BZQ's price is currently moving within a 20-point descending channel that provides an excellent risk-reward trading opportunity as the presidential election heads into the second-round runoff. Traders should look to open a long position close to the $35 level, where the fund is likely to find solid support from the channel's lower trendline. It may be prudent to wait for the RSI to move below 30 and for a bullish candlestick, such as a hammer, to print before taking an entry. Consider taking profits at either the 200-day SMA or the upper trendline of the channel. A stop-loss order could be placed a dollar or so below the entry point to protect trading capital.