Battle Plan Trade of the Week: Swing Trading the Emerging Markets Sell-Off
With the market providing us with fewer and few high quality pullbacks, our focused in the TradingMarkets BattlePlan has shifted from stocks to exchange-traded funds.
We have always tipped off swing traders to opportunities in the world of ETF trading, every day noting which ETFs are overbought and due to pullback or oversold and ripe for a bounce.
But as we have watched certain patterns develop in ETFs, we have found it more and more worthwhile to encourage traders to pay attention to this often-overlooked area for potential trades in an otherwise difficult-to-trade environment.
There are a number of advantages to trading ETFs. One of those advantages is that ETFs allow traders to make a broad-bet in favor of or against a particular stock market or sector without having to worry about picking the ONE STOCK that will best exemplify the move we expect. Instead, by trading an ETF, traders may sacrifice a little positive volatility for the relative security of knowing that if the market or sector moves as they expect – typically oversold markets moving higher and overbought markets moving lower – their position in the appropriate ETF will allow them to profit.
We saw such an opportunity develop in the country ETF for Brazil, the iShares Brazil Index Fund or EWZ
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PowerRating) last week. EWZ was trading below its 200-day moving average, and made an intraday low on October 10th. But two days worth of gains led the ETF to become increasingly overbought and vulnerable to potential reversal.
By the close of October 14, we believed that EWZ was sufficiently overbought to be a target for a short-term reversal (see Point A in Figure 2) We took a short position in EWZ on the close of that day at approximately 43.51. The ETF had a 2-period RSI of more than 88 as of that close, and a Short Term PowerRating of 2. This, as is also the case for stocks, is a recipe for reversal in our historic testing. So the short trade made sense.
What we didn’t quite expect was a reversal as swift or as powerful as the one we got. EWZ plunged lower the very next day, gapping down at the open, slicing through its 5-day moving average and continuing lower over the course of the trading session. By the end of the day, EWZ had lost more than 8 points — 19.6% – close to close.
Importantly, the 2-period RSI for EWZ, which had been above 88 when we initiated the trade, was under 19 as of the close on October 15th. Our exit in this trade was any close with the 2-period RSI under 30, so we took profits on the close. Many of our subscribers, alerted to the exit in the Battle Plan Wednesday before the market opened, took profits on the open of the following morning. (See Point B in Figure 2.)
If your trading has gotten tougher over the past weeks and months, then consider a free trial to our TradingMarkets Battle Plan. 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—