Brazil triggers an optimism index buy signal

Key points:

• The Optimism Index for the Brazil ETF (EWZ) reversed higher relative to its recent range
• A trading model that uses the Optix Index triggered a new buy signal
• The EWZ ETF has rallied 77% of the time after other signals

Using the optimism index to identify bullish sentiment reversals

A trading model that uses the Optimism Index (Optix) to pinpoint when sentiment reverses from a period of pessimism issued a buy signal for the Brazil ETF (EWZ) on 5/23/22. 

A trading model that identifies a reversal in the optimism index

The model applies an 84-day range rank to the 8-day moving average of the Optimism Index for the EWZ ETF. The range rank indicator measures the current value relative to all other values over a lookback period. 100 is the highest, and 0 is the lowest. The pessimistic reset condition occurs when the range rank for the Optix Index crosses below the 5th percentile. A new buy signal triggers when the range rank exceeds the 73rd percentile, and ETF momentum turns positive within 5 days of the cross. 

The Brazil ETF rallied 77% of the time after other signals

This model generated a signal 39 other times over the last 21 years. After the others, the EWZ ETF future returns, win rates, and z-scores were solid across almost all time frames, especially the 2-month window. Recent signals showed a positive return in 20 out of 24 instances at some point in the first 2 months. That's an impressive achievement, considering the amount of time the ETF has spent in a downtrend.

Countries with significant natural resource-based weightings continue to show the highest trend scores

South American country ETFs dominate the trend rankings, with Chile, Brazil, and Mexico showing the highest absolute and relative scores.

If you missed my note, Chile triggered an optimism index (Optix) buy signal on 5/20/22.

What the research tells us...

When the optimism index for the Brazil ETF (EWZ) reverses from a pessimistic level, it signals that traders have become more optimistic about the country's future direction. Using the Optix index to measure that change in sentiment, similar setups to what we're seeing now have preceded rising prices for the Brazil ETF, especially in the 2-month time frame.