Battle Plan Trade of the Week: ETF Trading and EWJ

This week has provided for only one trade in the TradingMarkets Battle Plan trading service for stock ETF and options traders. And while it was a modest trade with modest gains for our subscribers, our decision to sell short the iShares MSCI Japan Index ETF, EWJ
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proved to be a worthwhile one.

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We spotted the opportunity in EWJ the day after Christmas, when the ETF entered overbought territory below the 200-day moving average. This is a major red flag for us – and the way that we have caught a wide number of trading opportunities in ETFs over the past several weeks and months.

EWJ Chart 1

The higher EWJ moved and the more overbought EWJ became over the balance of the month, the more interested we became in the ETF. This is part of our strategy when it comes to selling ETFs short, adding to the position as the fund becomes increasingly overbought below the 200-day.

By December 31, we were short three units in EWJ (a full position for us). All that was required was for us was to exit the position on weakness. Remember, a cardinal rule in our approach to short term trading is to buy weakness and sell strength. When selling short, this rule is translated as: sell short strength and cover on weakness.

There are a number of different ways to exit short trades on weakness. Of late, for simplicity’s sake, we have been encouraging traders to wait for the ETF to close below its 5-day moving average and to use that close as the exit signal.

EWJ Chart 2

In EWJ, this exit strategy allowed us to cover our short trade on the fifth of January. Again, it was a modest trade in terms of gains – approximately 15 cents per share on average – but it was a textbook trade in terms of following our discipline, executing the trade accurately, and taking whatever gains the market gave us.

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David Penn is Editor in Chief at TradingMarkets.com.