Battle Plan Trade of the Week: Shine on You Crazy DIA

Stocks are lower in the first few hours of trading on Wednesday, as selling from the end of the Tuesday session carried over into the following day. Markets opened up largely in neutral territory Wednesday morning, neither overbought nor oversold.

It has been a relatively quiet few weeks in the Battle Plan, as the edges we rely on for our high probability trading strategies – especially those high probability trading strategies involving ETFs – have been few and far between. However the rally in stocks from last week did manage to push a few ETFs into overbought territory below the 200-day moving average and Battle Plan subscribers and traders were able to take advantage of that excursion into extreme territory.

The Dow Diamonds ETF
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had been trending higher below the 200-day moving average since early March. We spotted the ETF entering overbought territory below the 200-day on March 25th and when the DIA continued deeper into overbought territory – its 2-period RSI climbing from an overbought 72 to an even more overbought 87 – we knew an opportunity to sell the DIA short had arrived.

DIA Chart

Short the DIA on March 26th, our next step was simply to manage the trade. We manage short trades by looking for the first opportunity to exit on weakness. Recall that as high probability mean reversion traders, we look to buy weakness and sell strength. In the context of selling ETFs short, our strategy is to sell short strength and cover (buy back our shares) on weakness. And when it comes to short sales of both stocks and ETFs, we identify this weakness with a close below the 5-day moving average.

We got that weakness as of the close on March 30, as the DIA slipped below its 5-day moving average intraday and ended up closing two points below that level. Short the DIA at 79.10, we received our exit signal on the close two days later at 75.25 for a gain of more than 4.8%.

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