Trading the Rounded Reversal in Spain ETFs

02/09/2010 12:01 am EST

Focus: STRATEGIES

Corey Rosenbloom

Founder and President, Afraid to Trade

So much attention lately has been devoted to the “PIIGS” countries (Portugal, Italy, Ireland, Greece, and Spain) and their economic concerns, but I wanted to take a special look at Spain’s market index along with the iShares ETF to note a classic “rounded reversal” pattern that could be ending into a likely support area.

Let’s first take a look at the $INP - iShares Spain Index:

chart
Click to Enlarge

This is a textbook example of a rounded reversal pattern, complete with perfect arc pattern and lengthy negative momentum divergence preceding the rollover selloff at the $52 level.

Seeing this, it’s not surprising at all that price declined in a mirror-image fashion from the late-2009 rally.

While there are plenty educational lessons you can glean from this chart in terms of recognizing and trading the pattern, I wanted to focus on the key support level—or “line in the sand”—at the $38 to $40 index level.

This would mark the support zone (where we are now) from the July 2009 lows from which the rounded reversal pattern formation began.

Now that the news is out in the open, we could start to see a support bounce here at this level.

However, if we don’t, then look for a potential acceleration to the downside if this key level is broken. It would likely bleed over into other markets, suggesting a potential global contagion is at work.

But before that happens, let’s take a look at the tradable ETF with symbol EWP:

chart
Click to Enlarge

This time, I’m highlighting a perfect bull flag (which actually is better labeled an “AB=CD” measured move pattern) that projected a price target to the $52 level, at which price found resistance.

When you see a price come into the target of a bull flag and notice negative momentum divergences (as seen above), then that is a great time to exit any long positions and consider getting short on any reversal candles or other signs of price weakness at the projection target. This is a good educational example of that concept.

The price levels on EWP are almost identical to the index chart above.

As such, we should monitor the $38 to $40 level as a key support level that would be the determining line in the sand for what to expect going forward: A bearish confirmed reversal under, or just a deep pullback if above.

By Corey Rosenbloom of AfraidToTrade.com

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