Mexican stocks soar to historic highs

While the media and frustrated U.S. stock market participants worry about the ongoing negotiations in Washington, we'll focus our attention on the areas around the globe that are already working.

In case you hadn't noticed, Mexico is off the charts. Literally. The iShares MSCI Mexico Investable Market Index EWW broke out this fall to all-time highs and does not appear to be slowing down. This ETF seeks to provide investment results that correspond generally to the price and yield performance of publicly traded securities in the Mexican market. Some of the names in the basket include Telecom service provider America Movil, Walmart De Mexico, Grupo Televisa and Coca-Cola FEMSA.

There has been a clear level of resistance in the mid-60s for this ETF that dates back to the summer of 2007. The market failed to break out from those levels, even after trying for almost a year after initially reaching that ceiling. As a result, Mexico was absolutely decimated in the equities crash of 2008, losing over 65% of its value. This particular ETF, however, managed to then triple off the early 2009 lows. Meanwhile, the widely followed S&P 500 and Dow Jones Industrial Average merely doubled during that very same period.

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Most recently, Mexico has taken out, not just last year's highs, but also the previous all-time highs from back in 2007. These all-important levels in the mid-60s, that served as resistance for over five years, are now proving to be newfound support. During the global correction in equities that sent many stock markets down into mid-November, Mexico managed to successfully retest that breakout level from September. This reiterates to us not only how important this level is to the index, but also validates the breakout that we saw a few months ago.

Now that we know how strong this trend is, not just on an absolute basis, but also relative to equities as an asset class, we can look for ways to manage risk, while at the same time taking advantage of the upward momentum.

The initial target on this breakout appears to be the $75-$76 level, which represents the 161.8% Fibonacci extension from the 2011 lows up to the previously mentioned resistance. The next level of significance would be the measured move that we get from taking the 20-point height of the recent base and adding it to the breakout. This should take us up toward the mid-80s.

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Now, we don't just want to enter blindly because we're seeing fresh highs. We want to see these retests of support certainly hold, otherwise it would be a cause for concern. But I definitely wanted to mention this particular exchange-traded fund since there is so much relative strength coming out of this area that we can't possibly ignore. The relative strength is not just seen when compared to U.S. stocks, but more specifically Latin America. That's big.