Battle Plan Trade of the Week: A Two-Day China Trade in FXI
Our research tells us that stocks have a tendency to rally into the end of the month. This discovery, along with many others, is one of the key things that makes the new book by Larry Connors and Cesar Alvarez, Short Term Trading Strategies That Work, such a helpful tool for short term stock and ETF traders.
Click here to find out what traders are saying about Short Term Trading Strategies That Work
So we were hardly surprised to see a variety of stocks and ETFs moving into overbought territory toward the end of January. On the ETF side, this included everything from sector ETFs like the Technology Select Sector SPDRS ETF, XLK
(
XLK |
Quote |
Chart |
News |
PowerRating) to country ETFs like the iShares FTSE/Xinhua 25 Index ETF, FXI
(
FXI |
Quote |
Chart |
News |
PowerRating).
Overbought ETFs below the 200-day moving average mean one thing for stock traders and ETF traders who follow the Battle Plan: an opportunity to sell short.
We spotted the overbought conditions in FXI on January 27th and, as of the close on January 28th, we were short the ETF at the 25.93 level. At that point, the FXI had a Short Term PowerRating of 3 — among our lower ratings for stocks and ETFs. Even more crucially, the FXI had a 2-period RSI of more than 90. This represented an extremely overbought condition and a high likelihood of reversal in the short term.
The reversal we anticipated arrived swiftly. By the next day, FXI had plunged lower, gapping down by more than 70 cents and closing at approximately 24.54. More to the point, the FXI closed below its 5-day moving average, our exit signal for short trades in both stocks and exchange-traded funds.
Remember, when buying ETFs (and stocks) we look to buy weakness and sell strength. When selling ETFs and stocks short, we follow the exact same trading philosophy only in reverse: selling strength short and covering (buying back) on weakness when prices are lower.
To this end, our quick two-day trade provided Battle Plan traders with a fast gain of anywhere between 2-5% depending on exact entry and exit levels (some traders exit on the close, others wait until the following open)..
The trade in FXI was part of a number of profitable, short term ETF trades we took in the Battle Plan as stocks and ETFs became overbought below the 200-day moving average toward the end of January. If you have been thinking about trading ETFs, but didn’t know where to start, then consider learning about our Battle Plan trading service with includes trades for both stocks and ETFs.
Every day in the Battle Plan, we’ll provide you with incisive, before-the-bell commentary and analysis on the day’s markets to help put your trading in context. We’ll give you suggested entries and exits for trade opportunities that may be only hours away. And we’ll give you what many other people can’t: model-driven percentages so that you know the historical win rate going back to 1995 for every single trade idea—