Over the past few months, PowerShares Aerospace & Defense ($PPA) has shown great relative strength to the benchmark S&P 500 Index. The chart below shows $PPA breaking out twice over the past few months, setting higher highs and higher lows, while the S&P 500 SPDR ($SPY) has basically gone nowhere:



If an ETF is so strong that is manages to continue trending higher, even while the broad market is range-bound, that ETF typically surges much higher when the major indices eventually rally as well.

As detailed in my book, Trading ETFs: Gaining An Edge With Technical Analysis, assessing the relative strength of an ETF versus the main stock market indexes is the basis behind my proven ETF swing trading strategy.

Since breaking out to new highs three weeks ago, $PPA has pulled back to support of its rising 10-week moving average, which has held up all year during every pullback (10-week MA is roughly the same as the 50-day MA). The rock-solid support of the 10-week moving average is shown on the weekly chart below:



Because of the current pullback to the 10-week MA, we expect the price action to hold at or around this level over the next week or two before the uptrend resumes.

As such, $PPA now provides us with a low-risk buy entry point, and we are stalking $PPA for potential swing trade entry going into today's session.

Although $PPA may not lead us to a whopping 40% gain, like the Guggenheim Solar ETF ($TAN) trade we finally closed this week, the current pullback enables us to have a positive reward-risk ratio with a clearly defined stop price below key support.

As always, paid subscribers of The Wagner Daily newsletter should note our preset buy, stop, and target prices for this new ETF trade setup in the "Watchlist" section of today's report.

In yesterday's ETF trading commentary, we said we were buying iShares MSCI Japan Index ($EWJ) on its pullback. Since we informed subscribers we were buying at market on yesterday's open, we got a nice entry point on an intraday "undercut" below support of the rising 20-day exponential moving average.

As anticipated, $EWJ quickly found support and reversed higher throughout the session. This enabled the $EWJ to form a bullish "hammer" candlestick pattern and to close near its intraday high. This is shown on the daily chart below:

 

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.