This has already been a market environment the past few weeks where we’ve wanted to be selling Emerging Markets. But today we’re getting more specific into Latin America and shorting Mecradolibre $MELI.
Remember, like every other stock we discuss, 95% of the reasons why we’re choosing this stock has nothing to do with the chart of the stock itself. It’s the other 4,999 charts we look at every week that collectively point to buying or selling a particular security. In this case, we’re already sellers of Emerging Markets. The data suggests Latin America is one of the weaker links within EM, and $MELI just provides a clean risk vs reward to express this thesis.
Here is the chart showing Mecradolibre failing once again near this 677 level that has been trouble since last year. There is clearly still an overwhelming amount of supply here. The bet is that $MELI gets back down to 517, which would put it near the lower end of this multi-year range:
The brown line shows emerging markets failing to hold former highs, and a big reason why we’ve been sellers. And also notice how Momentum is putting in a bearish divergence at the recent highs that failed to hold. These developments combined with all of our other analysis suggests we should be selling the crap out of this thing.
From an execution standpoint, I only like $MELI short if it’s below 677. At some point it may or may not get above that. In that case, I would actually would much rather be long the stock. But our bet is that won’t happen soon, and in fact, will likely take some time. If it gets to the lower end of its range, we’re looking at taking profits around 517.
Momentum, Relative Strength, Sentiment and Price behavior are all playing a role in this decision to sell $MELI. This is a weight-of-the-evidence conclusion.
I hope this gives you some insight into our top/down approach to identify opportunities across markets.
What do you think? Are you selling this too?
All Star Options
The stock $MELI is expensive so if getting short a $650 stock feels pretty unappealing to you, I’ve got an options trade that may be more palatable.