This post is a small journal of my first macro trade of 2022.
If you follow the financial markets, I suppose you know the year started with some volatility. Fed tightening, Russia-Ukraine tensions, rotation from growth and high multiples stocks, etc. There are several reasons for the risk off sentiment brought up by the media, but at the end what matters is the price action.
Investors and traders get paid by price and nothing else…
The Idea Generation
As William O’Neil puts it:
Personal opinions, feelings, hopes, and beliefs about the stock market are usually wrong and often dangerous. Facts and markets, on the other hand, are seldom wrong.
All ideas should start with a close observation of the markets and a regular process of scanning for opportunities. Late in 2021, I started noticing 10 week moving averages crossovers in some of the large cap stocks of the Brazilian market. $PBR and $VALE were my examples on close watch. From there, I expected some sort of impact on the Brazilian Index. However, this was not immediate.
The momentum somehow matched what was I already seeing in the US markets. Oil related stocks and minerals were two sectors getting some attention.
Brazil as one the Emerging Markets is volatile and moves fast, so risk planning is more than necessary. I wanted a low risk entry and I did not want to play individual stocks. The idea was always to take the general market direction approach with the MSCI Brazil ETF.
December was a month of consolidation on both stocks mentioned. They found support with decent volume. This is generally a sign of accumulation.
So we had 2 of the largest components of the index moving upward but still no character change on the general market. This only meant I had to wait for my buy signal. Ideally I was looking for a range break on expanding volume.
I was closely following the $EWZ ETF as a mirror to the $IBZL. I have been exposed to the European traded Brazil ETF before as you see here. On Jan 11th, I saw exactly what I wanted. A range break, a large daily move and expanding volume. The next day, Jan 12th, at market open I placed my bet after the gap-up without hesitation.
I was confident in taking this trade because of the decoupling that I have seen. The top players moved first so the rest would soon follow eventually.
The Sell Rules
The trade started working immediately and my entry came out to be perfect. At the end of the day, I moved my stop to the low of the day while being almost up 2.5%. This was now almost a no risk trade!
The 10 and the 20 SMAs are generally my guide in uptrends and they do work! Any close under the moving averages, would trigger a 1/3 sale. This actually did not happen so I adapted my approach and started selling into strength. As the US markets were selling off, I would take for any large move to book some profits.
I sold 1/4 at 14%, another 1/4 at 16% and another 1/4 at 24%. Now trailing the remaining 1/4 with the 20SMA.
The trade is not over and I might buy again if there is a new base forming. With elections in Brazil, I do expect an explosive year either to the upside or to the downside. My only work here is to study, observe, capture the direction of the trade and make money.
With a trader’s mindset, I do not follow opinions of how Brazilian stocks are so “cheap” or do I care about the next elections. All I should care is the price action and my risk exposure.