One industry sector ETF that has shown relative strength since the broad market began its decline off the September highs is S&P Homebuilders SPDR ($XHB). Trading near its five-year high, $XHB only briefly "undercut" horizontal price support in mid-November, right before the major indices formed a near to intermediate-term bottom. Since then, price action has been choppy and seemingly noncommittal. However, $XHB is starting to form a "pennant" formation that could soon lead to a breakout to another new five-year high:



As you can see on the daily chart above, $XHB recently formed a lower high, followed by a higher low, which forms the anchor points of the trend channel of the pennant. Now, we are looking for the price action in $XHB to tighten up, while remaining within the confines of the "pennant." If price action tightens up, combined with declining volume, the first substantial breakout to the upside would present a potential buy entry.

Although recent price action on the daily chart may look unimpressive, zooming out to the longer-term weekly time interval often gives a better perspective on the "big picture" of the overall trend of a stock or ETF. When looking at the weekly chart below, notice how the choppiness of the past several months appears more as a consolidation near multi-year highs:



Obviously, it's too soon to buy $XHB right now, but this is one ETF to keep on your radar screen. Additionally, don't forget the numerous international ETFs we've been pointing out over the past week (several Asian and European ETFs), each of which we continue monitoring for a substantial pullback that would present a more positive reward to risk ratio for buy entry.

As mentioned in yesterday's newsletter, we are presently in "SOH mode" (sitting on hands). While yesterday's slight relative strength in the Nasdaq was an improvement, the day's price action was not solid enough to change anything on a technical level. As such, we continue monitoring for new potential trade entries behind the scenes, but are not yet listing any fresh "official" setups on today's watchlist.

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.