Battle Plan Trade of the Week: EWJ and ETF Trading
It has been a good week for TradingMarkets Battle Plan traders and subscribers, who have been able to take advantage of a number of overbought opportunities in exchange-traded funds. Of the three trades taken since last Wednesday, all three were ETF trades and all three were profitable.
In fact, in our most recent trade, we actually ended up entering, exiting and taking profits all in the same day. That certainly doesn’t happen every week in the TradingMarkets Battle Plan for Stocks. But it is always interesting to see where following the rules will take you. And in this case, it was a quick, one-day trade that netted Battle Plan traders and subscribers a quick 1% gain.
The trade I want to talk about today, however, was much more typical of the sort of ETF trading opportunity we have highlighted for our traders and subscribers for the past several months. Specifically, we look for instances in which ETFs are overbought, with 2-period RSIs of 70 or higher, as potential targets for trades to the downside. Remember that our research indicates that in the short term, stocks and exchange-traded funds tend to oscillate between overbought and oversold conditions. The key to successfully trading stocks and ETFs in the short term, then, is to catch these stocks when they are at one extreme and to take profits as they move back toward the other extreme.
To me, this is a true swing trading approach: trading stocks as they “swing” back and forth from “in demand” to “oversupply.”
We spotted an opportunity in the iShares Japan Index ETF, EWJ
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PowerRating) shortly after mid-December. The ETF had become overbought and was becoming increasingly so. We alerted our traders to the opportunity in EWJ, suggesting a short position as of the close on the 17th.
The following trading day, Friday, December 18th, EWJ moved lower in earnest, closing below its 5-day moving average and giving us our exit signal.
The end result? A nice 3% gain on the EWJ short trade initiated on December 17.
We have found that trading ETFs has been a perfect compliment to our Battle Plan stock trading – especially as the bear market has made it difficult to find the sort of quality pullbacks in stocks trading above the 200-day moving average that have been our bread and butter before the downturn became severe. Our ETF trading strategy gives us the flexibility to take advantage of overbought markets with the same straightforward trading discipline that we have used to make money trading stocks in oversold markets. Again, the combination of stock and ETF trading has been a truly winning one for Battle Plan traders and subscribers and we are looking forward of carrying this success forward into 2009.
If your trading has gotten tougher over the past weeks and months, then consider a free trial to our TradingMarkets Battle Plan for Stocks. Every day 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 – long and short.
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David Penn is Editor in Chief at TradingMarkets.com.