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 7/25/22.
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 19 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 signal shows a gain at some point in the first month in 16 out of 19 instances. The previous alert is a good reminder that one must take quick profits in a bear market.
A reversal in short-term price trends for commodities
Short-term commodity price trends have reversed from a depressed level, which should help natural resource-based country ETFs like Chile in the near term.
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 first few months.