Chile triggers an optimism index buy signal

Key points:

• The Optimism Index for the Chile ETF (ECH) reversed higher relative to its recent range
• A trading model that uses the Optix Index triggered a new buy signal
• The ECH ETF has rallied 78% 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 Chile ETF (ECH) on 5/20/22. 

A trading model that identifies a reversal in the optimism index

The model applies an 84-day range rank to the 6-day moving average of the Optimism Index for the LIT 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 81st percentile, and ETF momentum turns positive within 5 days of the cross. 

The Chile ETF rallied 78% of the time after other signals

This model generated a signal 18 other times over the past decade. After the others, the ECH ETF future returns, win rates, and z-scores were solid across all time frames, especially the 2-month window. The ECH ETF is a relatively new instrument. Trading started in 2007. We also need to keep in mind that one stock, Sociedad Quimica y Minera de Chile (SQM), accounts for a significant portion of the overall ETF weighting.

Fertilizer and lithium are two themes in the headlines of late that benefit Chile

Sociedad Quimica y Minera de Chile (SQM), a Chilean company, produces fertilizer and lithium, which are two natural resource-based themes in the headlines of late. With sanctions on Russia, a significant exporter of fertilizer, SQM could benefit. I would also call your attention to a recent Bloomberg article with the following title.

"Lithium Triangle Unites for Push Toward Battery Making - Argentina, Chile, Bolivia seek bigger role in EV supply chain."

If I apply my RSI trading model to SQM, we see that the system triggered an alert late last week. SQM accounts for 32% of the total weighting in the ECH ETF.

Please click here if you would like to learn more about my RSI trading model.

What the research tells us...

When the optimism index for the Chile ETF (ECH) 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 Chile ETF, especially in the 2-month time frame.