New bottom formations on the charts for two embattled emerging ETFs signal better days may be coming in 2012, and those who buy now can tap into significant upside potential.

On Tuesday (Jan. 17), the economic data out of China encouraged traders and helped boost the stock market. Even though the data reflected a contracting economy, it was not as weak as most expected. Foreign direct investment declined in November for the first time since 2009 and further lowering of bank reserves is likely in the coming months.

Brazil’s rate cut in August caught the markets by surprise and likely avoided pushing the Brazilian economy into a technical recession. That nation’s economy seems to be turning the corner, as November’s data on economic growth beat forecasts. The market is now expecting another rate cut later today.

The outlook for India and Russia seems to be less positive, and after a dismal performance by all of the BRIC ETFs in 2011, the technical outlook suggests that there will be some bright spots in 2012.

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Chart Analysis: The iShares MSCI Brazil Index Fund (EWZ) completed a reverse head-and-shoulders bottom formation last Friday, having closed above the neckline, line a.

  • There is next strong resistance in the $68-$72 area with upside targets from the bottom formation in the $77 area. EWZ traded above $80 in early 2011
  • Relative performance, or RS analysis, seems to have formed a double bottom (line c) but needs to move through resistance at line b to confirm
  • The on-balance volume (OBV) formed sharply higher lows in December (line e) and is now challenging strong resistance at line d
  • The volume pattern is consistent with a reverse head-and-shoulders (H&S) bottom, as volume was highest in August and was lower as the head and right shoulder were formed
  • There is now initial support for EWZ at $61.50 with stronger support in the $58-$60 area

The Market Vectors Russia ETF (RSX) also shows a potential reverse H&S bottom formation with the neckline (line f) in the $31.20 area. There is important resistance at the October high of $32.68.

  • RS analysis is still negative, as it has formed lower lows (line h) and needs a strong move through the downtrend, line g, to indicate that it is bottoming out
  • OBV also shows a pattern of lower highs (line i) and lower lows (line j), which is negative
  • Weekly OBV (not shown) is still negative as well
  • There is first support for RSX in the $26-$27 area with the October lows at $23.23

NEXT: China ETF with Big Upside Potential

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The WisdomTree India Earnings Fund (EPI) peaked in November 2010 at $28.72, and despite its recent bounce, it is still down over 38% from its high.

  • There is next chart resistance at $19 with the major 50% Fibonacci retracement resistance at $20.50. The 61.8% resistance level stands at $22
  • The RS line is still in a well-established downtrend (line b) and shows no signs yet of a bottom
  • Daily OBV is also weak, as it made further new lows in December and is still below its downtrend, line c
  • There is first good support for EPI in the $16-$16.50 area

The iShares FTSE China 25 Index Fund (FXI) shows a potential reverse H&S bottom formation with the neckline (line d) now at $39.15. There is additional chart resistance at $40.25 along with the downtrend, line a.

  • A completion of the bottom formation would give targets in the $50-$51 area
  • RS analysis is close to bottoming, as it has formed higher lows, line f, and is now quite close to its downtrend, line e
  • A move above the November highs will complete the bottom formation
  • Daily OBV has just broken through its long-term downtrend, line g, and shows a strong uptrend (line h)
  • Minor support now stands in the $35-$36 area with the right shoulder (RS) at $33.33

What It Means: The sharp increase in copper prices, which is in a strong seasonal period, is taken by many as a sign of a strengthening global economy, which is precisely what the emerging markets need.

Of these four BRIC ETFs, the Brazil and China funds look the best, as the iShares MSCI Brazil Index Fund (EWZ) has completed its bottom formation.

The volume and RS analysis suggests that the iShares FTSE China 25 Index Fund (FXI) will also complete its bottom formation. Though buying FXI before the formation is completed has a higher risk, there is also significant upside.

How to Profit: For the iShares MSCI Brazil Index Fund (EWZ), go 50% long at $61.72 and 50% long at $60.58 with a stop at $56.12 (risk of approx. 8.2%).

For the iShares FTSE China 25 Index Fund (FXI), go 50% long at $36.82 and 50% long at $35.80 with a stop at $32.18 (risk of approx. 11.3%).