Latin America has been one of the worst performing areas of the world since it peaked in 2011 with a lot of the metals and mining companies. The countries that make up the Latin America 40 index have a lot of exposure to that space so they tend to behave in a similar fashion. More recently, the index has been forming what looks to me like a falling wedge pattern. A breakout clean above this formation would trigger the beginning of a new trend, which could mean some serious changes in money flow.

Here is a weekly bar chart of the Latin America 40 ETF $ILF. Look at the falling, converging trendlines in red that define the upper and lower boundaries of the wedge. Also notice that support earlier this year came right at the 61.8% Fibonacci retracement from the entire 180% rally from 2008 to 2011. What I love about this pattern is the brief whipsaw below both the lower trendline and 61.8% retracement level before quickly reversing back in to the 3-year pattern. We often see failed breakdowns like these lead to vicious breakouts in the opposite direction:

Although a breakout above the upper downtrend line would be a bullish signal, I would feel much more comfortable calling this a new uptrend once we take out the October highs. This would be the first higher high, from a structural perspective, in years. I would then consider this to be extremely constructive for Latin America and the unanimously hated metals and mining space as a group.

Now looking at momentum, it appears as though that low earlier this year coincided with a bullish momentum divergence. While prices were making a lower low (the “failed breakdown” mentioned above), momentum as measured by a 14-period RSI was putting in a higher low. Here is a closer look at the weekly bar chart above showing the bullish momentum divergence in Latin America:

Long time readers know how much I respect a momentum divergence this massive, especially on a weekly time frame. These longer-term divergences often ignite powerful moves in price that can last a long time.

Finally here is a shorter-term look at these recent developments, but this time using daily candlesticks and a 200 day moving average. Look how prices exploded higher once they got them back above last summer’s lows. That squeeze could definitely the beginning of something bigger. Look at the 200 day moving average now turning higher. As mentioned earlier, I would still feel more comfortable calling this a new uptrend once we start making higher highs above the October peak:

There isn’t really anything for me to do here personally execution-wise, because it doesn’t exactly fit my time horizon and risk parameters. To me, this is just an interesting development that could lead to a monster position in either the Latin America 40 Index, or one of its components, whether it be Chile, Peru, Brazil or otherwise. But we’re all different in terms of our goals, so this might be actionable for someone else. I can’t make that decision for you.

Either way, I’m fascinated by what’s happening in this market. There are a lot of frustrated participants here as the developed nations race to historic highs and this market is still almost 60% away from getting back to the 2008 highs. What do they say? “One man’s trash is another man’s treasure”? I try my best to keep an open mind, but I can’t help but find these developments to be incredibly intriguing.

Stay tuned….

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Tags: $ILF $EWW $EPU $ECH $GXG $EWZ