IWM Case Study: How the Red Dog Reversal Works, Long and Short
Brought to You By Power Plays
The Red Dog Reversal (RDR) is a trading technique I use to catch countertrend moves in an oversold or overbought stock.
It's been one of my bread-and-butter strategies for years.
And my community just had the chance to use it both long and short with IWM — within the span of a few days.
As many traders know, IWM recently went on a tear when small caps look over leadership from large-cap tech.
But IWM has been quite volatile, allowing us to play it from both sides. And today I'll show you how you could have spotted a nice shorting/selling opportunity — followed by a long.
First, we'll go over the Red Dog Reversal Sell Rules .
Here are the 4 steps to a Red Dog Reversal Sell:
- Stock is up for multiple days
- Stock goes above prior day’s high
- Stock trades back below through prior day’s high, which is where the sell/short triggers
- The stop is set at the current intraday high
Here's how it played out with IWM:
- IWM rose for 5 days in a row into 7/16
- On 7/16, hit a high of $224.86
- On 7/17, IWM went above $224.86 and then below for a sell/short at that level
- Stop is set at the new 7/17 high of $226.84
Since the short entry is $224.86 with a $226.84 stop, we are looking at risk of $1.78 per share.
And on Monday July 22, IWM hit a low of $215.38. (more on this important level below)
I was happy about the decline 0ff the highs because I was short the IWM ETF plus IWM calls.
Those positions were getting hairy when IWM was ripping, but it resulted in a nice profit.
And on Friday, July 19 — I flipped it around. I went home long IWM calls and short IWM puts (shorting puts benefits from rising prices) — just in time for Monday's rebound.
Incidentally, that $215.38 level mentioned above was a Red Dog Reversal buy.
Here are the Rules for a Red Dog Reversal Buy:
- Stock is down for multiple days
- Stock goes below prior day’s low
- Stock trades back up through prior day’s low, which triggers the entry
- The stop is set at the current intraday low
Here is how it played out on the chart:
- IWM fell 3 days in a row through 7/19
- On 7/19, IWM hit a low of $215.85
- On 7/19, IWM broke below $215.85 and reclaimed it to trigger long
- Stop is set at the new 7/22 low of $215.38
With a long entry at $215.85 and a stop at $215.38, the trade would have risk of 47 cents per share.
IWM soon hit $220+, which was an impressive move for trade with 47 cents of risk.
While not every Red Dog Reversal trade works out, it's certainly exciting when they do.
And in this case, it showed how effective it can be both long and short when you are opportunistic.
Positions Disclosure as of 2024-07-22 at 3.25.55 PM
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