Battle Plan Trade of the Week: AGG and the One Day Bond Trade
Top quality short term trading opportunities have been relatively few and far between over the past week. In part, this is because stocks have been under fairly relentless selling pressure for most of the month.
While this selling pressure has created oversold conditions in a number of stocks, we have not seen the sort of low, 2-period RSI, high Short Term PowerRating stocks that we like to rely on when making trades for the Battle Plan. Conversely, because there have been precious few bounces during the stock slide, we have not had the kind of overbought stocks and ETFs that have provided some of the better short-selling trade opportunities in recent weeks and months.
That said, we did have one opportunity for a trade this week that, while not overwhelmingly profitable, nevertheless allowed us to exercise our trading discipline. As short term traders, we are always happy to take singles and doubles where we find them, knowing that the home runs – and even the occasional grand slams – will take care of themselves.
Our “single” trade this past week was in the iShares Lehman Brothers Aggregate Bond Fund ETF, AGG
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We spotted this opportunity after the ETF, which had been trading above its 200-day moving average, had closed lower for four consecutive days. This kind of price action, combined with a low, 2-period RSI of just above 9 on January 9th, signaled to us the oversold condition of AGG and the potential for upside in the near term.
In this instance, we took a position in the ETF on the open of January 12 at approximately 102.50.
Our exit signal in this trade was the same as for all our Battle Plan trades: a close above the 5-day moving average. Remember that whether we are trading stocks or trading ETFs, we always look to buy on weakness and sell into strength.
Given that exit rule, we got our signal very quickly – the next day, in fact – as AGG gapped up 25 cents on the open of the following day and managed to close above its 5-day moving average at 103.06, triggering an exit near 103.22 – or even higher for those who waited to exit on the following open.
With a closing price of 103.22 on January 13, our profit in this trade was modest – maybe even more of a bunt than a true single. Nevertheless following our trading discipline remains a key component in helping us navigate what are still very volatile markets – no less in the world of bonds, where increasing numbers of traders and investors have huddled for protection. This may mean that the trading will be more conservative than we or our subscribers may prefer. But again, the key to our success in recent months has been to stick with what has been working – and as we have seen, buying weakness and selling into strength works.
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David Penn is Editor in Chief at TradingMarkets.com.