Brazil Provides An Alternative to Commodities

The Brazil trade is heating up, and it seems that everyone is interested in this market. Brazil is really just another way to play the commodities rally, and we believe that traders may see this as a more "palatable" way to buy into the commodity bull market. We're long-term commodity bulls, and getting long Brazil is a perfectly acceptable way of getting involved, as long as traders understand that this trade doesn't work without continued strength in the commodities market.

Brazil is the one part of the "BRIC" trade (Brazil, Russia, India and China) which shook off the recent bear market and is now poised to continue the long-term uptrend. The commodity bull market is intact, and we expect to see continued strength. The easiest way for traders to get long the Brazilian market is to buy the iShares MSCI Brazil ETF (EWZ - commentary - Cramer's Take).

The Brazilian Bovespa index recently surged higher and broke out over resistance in conjunction with a bullish call from Standards & Poor's on the index. The minor catalyst of an S&P call breaking this market out shows us that this index "wanted" to breakout. There is clearly a bullish undercurrent in this index which is likely due to the strength of the commodity market.

iShares Brazil ETF

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The EWZ has formed a large bullish head-and-shoulders consolidation within the primary uptrend. This is a bullish continuation pattern, and should provide a strong base for this index to move higher and continue the primary trend. The ETF has shown strong relative strength vs. the S&P 500 and has outperformed the domestic market since 2004.

The recent breakout in the Brazilian Bovespa Index suggests that this outperformance is likely to continue for the time being. The EWZ has significant support at the prior resistance line at $88. We would use a confirmed break of this support at $85 as a stop loss.

The strength in the Brazilian real also suggests that this economy is performing quite well. The real has moved higher within the uptrend channel and doesn't show any signs of weakening at the moment.

The Brazilian trade is a good way for traders who are looking to play the strength in commodities without buying into some of the overextended commodity-related names. This market has just broken out from a large consolidation, and the index is poised to push higher as long as the commodity market remains buoyant.

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At the time of publication, John Hughes and Scott Maragioglio had no positions in the stocks mentioned. Hughes and Maragioglio co-founded Epiphany Equity Research, which has developed and utilizes proprietary tools to identify and track liquidity changes in the market indices and sectors. Hughes advises numerous asset managers, hedge funds and institutions managing in excess of $30 billion. Maragioglio is a member of the market technicians association (MTA) as well as The American Association of Professional Technical Analysts (AAPTA) and holds a Chartered Market Technician (CMT) designation. Maragioglio has also served on the board of directors of the AAPTA.