Last week, I discussed how managing your winning trades is just as important as dealing with your losers.
That’s because a profitable trade can turn into a loser in the blink of an eye.
So we need to bank our profits as soon as we see them.
Today, let’s look at an Invesco QQQ Trust Series 1 (QQQ) trade from last year to show exactly what I mean.
We generated a 21% return with my options trading service, One Ticker Trader, in just four days…
Shifting Sentiment
After rallying 48% from its January lows, QQQ topped out in mid-July.
First, there was the Nasdaq rebalance, when the index made sure it wasn’t overweighted in its top companies.
Some mixed earnings from market heavyweights like Apple and Microsoft followed.
Altogether, QQQ dropped around 9% in a month.
And after that, it struggled for direction. The market sentiment seemed to change nearly every other day.
Take a look at the chart:
Invesco QQQ Trust Series 1 (QQQ)
Source: e-Signal
Buying momentum had already started to track lower before QQQ peaked on July 19.
QQQ was making higher highs (upper orange line). But the Relative Strength Index (RSI) was tracking lower from overbought territory (lower orange line).
QQQ’s fall accelerated as the RSI fell below support (green line) and into its lower band.
But that move overshot to the downside.
So a reversal in momentum (red line) saw QQQ lock in its low at ‘A’ and start trending higher.
From there, QQQ rallied up to ‘B’ before rolling over again.
So with QQQ falling off its lower high at ‘B,’ we saw that QQQ could soon retest and bounce off its 21-day Moving Average (MA, blue line). This is a level that traders widely watch.
That would coincide with the RSI testing support (orange arrow). That was another setup that could also help QQQ bounce.
And beyond these technical signals, another temporary dynamic was driving the market…
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Don’t Trust the Headlines
Apple (AAPL) had tanked off reports that China had banned iPhone sales to government staffers.
Given its huge weighting in the Nasdaq, that added to QQQ’s fall.
But even if that story had been correct, it would have only represented around 1-2% of AAPL’s iPhone market in China.
This means that the market vastly overreacted to the news.
So we entered a long position in QQQ by buying a call option on September 7. A call option increases in value when the underlying stock rises.
And our timing was spot on.
Take another look:
Invesco QQQ Trust Series 1 (QQQ)
Source: e-Signal
From the moment we entered our position, it started going our way.
We closed out our trade by selling our call option just four days later for a quick 20.9% gain.
By watching key technical levels and not getting greedy, we can quickly generate nice, profitable trades like this.
That’s the way to start snowballing your account.
We’re taking a fresh look at QQQ’s action in One Ticker Trader again this month.
So if you’d like to join us and take part in our next trade, simply go right here to learn how.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict