The Sentiment Is A-Changin'

The broad market's intraday price action over the past several days has been indecisive and a bit whippy, but more subtle is the rare show of resilience stocks have displayed. Throughout October and November, stocks rallied in the early afternoon, then nosedived into the close. But on Dec. 2 and 3, the broad market displayed the inverse pattern. Further, despite the large selloff on Dec. 1, the S&P and Dow have closed higher in seven of the last eight sessions (through December 3).

iShares Xinhua China 25 (FXI) vs. S&P 500 Since October 2008

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Source: TradeStation

While it's still too early to know whether the recent rally attempt will get legs, astute traders may be noticing the start of an important change in overall sentiment. Consequently, a few ETFs are setting up for potential buy entry. iShares Xinhua China 25 (FXI - commentary - Cramer's Take) has been showing relative strength to the broad market for the past several months, and is now poised to break out above consolidation and its 50-day moving average. The line chart above illustrates FXI's relative strength to the S&P 500 since the beginning of October 2008.

The S&P 500 (the red line) clearly set a "lower low" last month (B) when it fell below support of its prior low from October 2008 (A). But when the S&P 500 set its "lower low," notice the FXI actually set a "higher low" (C), indicating relative strength. ETFs like this typically outperform the market on the "up" days, while losing less than the broad market on the "down" days.

Since forming its "higher low," FXI has been consolidating in a tight, sideways range for several weeks. I expect it to soon break out to form a "higher high," which would confirm an intermediate-term trend reversal. The daily chart of FXI below more clearly illustrates the buy setup.

iShares Xinhua China 25 (FXI) -- Daily

Click here for larger image.

Source: TradeStation

My buy entry into FXI will be a rally above the Dec. 3 high (circled in pink), which should also confirm the breakout above the 50-day MA. Ideal stop placement is below the Dec. 1 low of $24.41, plus the usual "wiggle room" to allow for a probe below support. Another ETF that has shown relative strength and has a similar pattern is Utilities Select Sector SPDR (XLU - commentary - Cramer's Take).

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At the time of publication, Wagner was long XLU.

Deron Wagner is the founder and head trader of Morpheus Trading Group. His daily focus is managing and trading the Morpheus Capital Hedge Fund, which he founded in April of 2004. He also teaches his trading methodology with The Wagner Daily, The MTG Stalk Sheet, and The Wagner Weekly newsletters.