Mexico and Latin America Are Still a Sell

One of my favorite parts about being a technician is the ability to apply all of our tools to stock market averages from all over the world. You would be amazed at how much better my geography has gotten over the years.

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Today we are focusing our attention on Mexico.

The first chart shows the monthly bars for Mexico so we can get a long-term perspective on what's really going on here. I think we have a very clear breakout above 2007 and 2011 highs that just couldn't hold. The buyers seem exhausted and failed to absorb all of that former supply. Meanwhile, you can see momentum already rolling over at those new highs. The 14-period RSI confirmed a bearish divergence in Mexico during last year's highs. Not good structurally.

The next graph is a relative chart of Mexico vs the S&P500. While Mexcio was putting in a false breakout and bullish divergence (as we can see above), EWW/SPY was also putting in a false breakout. Notice the brief new high on a relative basis last January. This is just another great example of the old, "from false moves come fast moves in the opposite direction":

We are now breaking below an uptrend line on a relative basis that takes us all the way back to 2006. This is not bueno, if you will.

I also think it's worth pointing out that Latin America as a whole is in rough shape as well. We know that Mexico is a large component of the Latin America 40, along with Brazil. So here is Latin America in a clear downtrend relative to the US making 8-year lows this week:

So structurally we know that we don't want to be long Latin America and we don't want to be long Mexico. But what about in the short-term?

Here is what's currently happening in Mexico. I see a decisive break of an important uptrend line off the 2011 lows. When markets are breaking big uptrend lines, I can't take that as a bullish sign (especially as S&Ps here in the US are making all-time highs):

And finally here is a daily candlestick chart showing prices in 2014 breaking down below a pretty clean symmetrical triangle. This range from the second half of last year is well-defined by these two converging trendlines. With a declining 50 & 200 day moving average, I cannot say that I'm surprised that the resolution out of this consolidation was to the downside.

Also notice the momentum plotted below. This is a 14-day relative strength index failing to reach overbought conditions on rallies and consistently hitting oversold conditions on sell-offs. This is a critical bear market characteristic and not something you find wherever there is strength.

The bears are in control, very much so. From a risk management perspective I always try to ask myself what could change my mind. And quite frankly it's going to take a lot for me to flip my thesis and get bullish Mexico, on both an absolute and relative basis. I think time is probably the best remedy here. If the bulls can dig in and hold these lows, I would have to see a nice base built that takes long enough to flatten out these smoothing mechanisms. At that point, and it seems far fetched, I would consider avoiding this one from the short side.

This is one of the worst places on earth. You're not just fighting the ongoing bear market in emerging economies, but you're also fighting an ongoing disaster that has been Latin America. To me these are still a no-touch or outright shorts.

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Tags: $EEM $ILF $SPY $EWW