Is South Africa Ready to Run?

12/28/2010 9:45 am EST

Focus: ETFS

Thomas Aspray

, Professional Trader & Analyst

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Chart Analysis: The MSCI South African Index ETF (EZA) has been in a sideways pattern (lines a and b) since mid-October and the trading range is approximately $7 wide. Therefore, on a strong close above the $73 level, the minimum upside target is in the $80 area. If EZA has made its final test of the support at $66, then typically, the fund should not drop back below the midpoint of the range, which is at $69.50. While prices have been locked in a range, the on-balance volume (OBV) has recently made new highs and is in a solid uptrend. This suggests accumulation.

What It Means: There is a high probability, after the dramatic rally from the July lows, that the sideways pattern in EZA is a continuation pattern or an interruption in the uptrend. This does favor a breakout to the upside, as does the positive volume action.

How to Profit: There are two ways to approach this trade. One is to wait for a breakout and then use a stop under $69.30, which could be moved to under the 20-period exponential moving average (EMA) currently at $71.40 when EZA moves above $75. The second option would be to buy in the $71.80-$72.20 area with a stop at $69.30. Then, once above $75, the stop should be moved to $71.39. This has a better risk/reward profile, in my opinion. The risk, if you are filled at $72.19 and then stopped out at $69.30, is $2.89 per share. With a target at $80, the potential reward is $80-$72.19, or $7.81 per share. This is a risk/reward ratio of $7.81/$2.89, or 2.70, which is not too bad.

Tom Aspray, professional trader and analyst, serves as senior editor for The views expressed here are his own.

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