The Weakest Region In The World

May 7, 2020

From the desk of Steve Strazza @Sstrazza

There aren't too many charts in the Equity Markets breaking out of decade-long bases on an absolute basis right now...

This week's Mystery Chart was though, and the vast majority of you were buying it against former resistance turned support. We agree with that approach and would be doing the same here.

Thanks as always to all those who participated, but there's just one catch...

The chart was inverted! This means most of you were actually selling the breakdown in the Latin America 40 ETF (ILF).

Here is the same chart on an uninverted basis. Let's dive in and see what's going on with Latin American equities.

Click on the chart to enlarge view.

They are a complete and total mess. As long as price remains below this critical former support level, the only move here is to fade strength back towards the recent highs and key 2008 and 2016 lows in the $20 range.

Now that we've uninverted the chart, all the positives we detailed in our Mystery Chart post are actually negatives. Let's recap them quickly.

There was still a breakaway gap that led to a runaway gap and vicious ensuing move... but the gaps were to the downside and the rally wasn't a rally at all - it was a crash.
Price is digesting its recent losses in a constructive way, forming what looks to be a continuation pattern below former support at key prior lows.
This is actually a 15-year topping pattern, NOT a bullish base... And the way I learned it is "the bigger the top, the bigger the drop," so expect this breakdown to see some downside follow-through.
The series of lower highs and lower lows tells us there was a bearish bias to this consolidation even before it plunged to fresh lows.
Momentum hit a record oversold reading, confirming the new lows.
Momentum has been in a bearish regime since early 2018.

In case all of these bearish characteristics don't have you convinced, let's take a look at Latin America relative to Global Equities.

We don't want to beat up too much on ILF, so let's look at a ratio chart of it versus the All-Country World Ex-US Index (VEU).

Charting it against anything with US exposure just wouldn't be fair, so this will show us how it's performing against the rest of International Equities, the vast majority of which are seriously underperforming the US as well.

New all-time lows as price just resolved lower from a 4-year base within the context of a decade-long structural downtrend.

Just to be sure we cover all the bases, here's Latin America relative to its Emerging Markets (EEM) peer group.

Another landslide down. Notice how all three of these charts look similar, with significant distribution occurring as these long-term tops resolve to record lows.

ILF also recently made fresh all-time lows relative to Frontier Markets which we just wrote about being the weakest of all the diversified International ETFs. It appears Latin America is hands-down the weakest region in the world right now.

Much of its underperformance is being driven by the weak LatAm currencies, many of which have been falling against the strong dollar for years, even decades now.

But regardless of the reasons, the story here is simple. There are absolutely no redeeming qualities about ILF on either an absolute or relative basis. We want to short this chronic underperformer on any strength towards $20, using the same level as our stop and the March lows of 15.50 as our price target over the next 1-3 months.

With that said, if we do get a move to the downside it's likely to come hard and fast, and if the recent lows are violated, we could see much lower prices. But we'll worry about that if and when the time comes.

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Thanks for reading and please let us know if you have any questions!

Allstarcharts Team