Battle Plan Trade of the Week: Selling SPYs into Strength
Tuesday’s close marked the 14th successful Battle Plan trade out of the 15 we have recorded for 2009.
This is what High Probability Trading is all about.
As stocks moved higher last week, we knew that more and more traders were getting excited by what Larry Connors has called the “Race to the 200-day.” This refers to that moment after a major low below the 200-day moving average is created when extremely oversold stocks and ETFs – oversold on an intermediate to longer-term basis – begin rapidly moving higher.
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This is largely as a result of massive short-covering. It does include some speculative buying, to be sure. But at this point, many of the forces driving prices higher from exceptional lows are emotional ones. As such, the rally – whether it represents a new bull market or a bear market rally – tends to be sharp and inclined toward extremes.
These overbought extremes below the 200-day moving average are precisely what alerted us to the potential opportunity in the SPY. We noticed that with stocks getting increasingly overbought in mid-April there was a growing opportunity to take advantage of overbought conditions in ETFs like the SPY by selling shares of the ETF short as they rallied deeper into overbought conditions below the 200-day moving average.
In fact, the higher the SPY moved last week, the more shares we sold short. By Friday, we had built a full short position in the SPY, and were simply waiting for the next, healthy sell-off to exit the position.
Those who have followed the Battle Plan Trade of the Week column over the past several weeks and months are likely familiar with this high probability approach to trading ETFs. For those of you who are not familiar with our ETF trading approach, consider joining Larry Connors this Thursday at 4:30 p.m. for a special presentation on our high probability ETF trading strategies as taught in our Swing Trading College, which will begin next month.
Getting back to the Battle Plan, as you might expect, the aggressive sell-off on Monday provided us with the necessary weakness to cover our positions (buying back the shares of SPY sold short), taking profits on the way. With an average short entry price of 86.47 and an exit on Monday’s close at 83.43, traders were able to pick up more than three points on a trade that lasted about a week.
Every day in our 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 short term trading opportunities in stocks, ETFs and options 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.