In order to identify the best ETFs to buy now, it's important to determine which ETFs showed the most relative strength to the broad market during the recent decline. ETFs that made lower lows and lower highs in recent months, alongside of the main stock market indexes, are probably not the best ETFs to trade right now because there is no bullish divergence. Rather, we have been screening for ETFs that held up near their highs, even while the Nasdaq was getting hammered.

So, which ETFs exhibited the most relative strength after the major indices started selling off in September? With the exception of S&P Homebuilders SPDR ($XHB), just about all the ETFs that showed relative strength were international ETFs, which have a lesser correlation to the direction of the US stock market. One such ETF that has been holding up well, and is now setting up for a possible swing trading buy entry is iShares Poland Index ($EPOL). As you can see on the chart below, $EPOL is poised to break out above resistance to a fresh 52-week high:



Because of its potential breakout pattern, we are monitoring $EPOL as a possible swing trade buy entry today. Regular subscribers of The Wagner Daily should note our exact trigger, stop, and target prices for this trade setup in the ETF Trading Watchlist section of today's newsletter.

In addition to $EPOL, there are several other international ETFs that have held up well during the recent correction. One such ETF was iShares China Xinhua 25 Index ($FXI), of which we bought a small "starter position" yesterday. A few other international ETFs with relative strength on our radar screen include: Hong Kong ($EWH), Turkey ($TUR), and Philippines ($EPHE). Of these, $EPHE has been so strong that it broke out to a fresh all-time high just one day after the November 16 lows were formed in the US markets. Now, it is on our radar screen as a potential buy entry if it pulls back to near new support of its recent breakout (remember that a prior level of resistance becomes the new support, after the resistance is broken):



Although we bought FXI yesterday, our position in the inversely correlated ProShares Short Russell 2000 ($RWM) hit its stop when the Russell 2000 Index gapped up above major resistance of its multi-month downtrend line, as well as the high of its November 28 bearish reversal candle. But that's okay. The setup at time of entry was solid, and our stop was in the right place. It was simply a trade that didn't work out...wasn't the first and definitely won't be the last. Whenever we have trades that turn out to be losers, we always ask ourselves the following question: "Given what I know now, would I still have entered the trade when I did?" If the answer to that question is "yes," then there is never a reason to feel bad about a losing trade because it means the trade setup was solid and we simply followed our trading plan.

We've been scanning extensively for bullish ETF swing trading setups over the past few days, but most of better looking chart patterns presently belong to individual stocks, rather than ETFs. This is normal, as new leadership in markets reversing off their lows usually begins with breakouts in strong stocks, then subsequently filters down to ETFs (which are usually indexes of stocks). However, in sideways to down markets, ETF trading opportunities are usually much better than with individual stocks; hence the reason our swing trading service trades both ETFs and individual stocks in its model portfolios, the balance of which is dependent on the current mode of our market timing model. This enables us to have the "best of both worlds" by having low-risk, profitable trading opportunities regardless of market conditions.

Deron Wagner is the Founder and Head Trader of both Morpheus Capital LP, a U.S. hedge fund, and MorpheusTrading.com, a trader education firm.