How We Made a 59% Profit in a Single Day

Traders can easily fall into the trap of letting the headlines dictate what they trade.

For example, they see reports that tech stocks are getting smashed and decide to give the whole sector a wide berth.

But in doing so, they’re missing out on plenty of trading opportunities.

Even if a stock is plummeting, there’ll always be counter-rallies against the overall downtrend.

Take for example, a trade we recently made through my options trading advisory, The Opportunistic Trader.

Two weeks ago, we generated a 59% return in just one day by trading Microsoft (MSFT).

Let me show you how…

Watching for Counter-Rallies

As you can see on the chart below, MSFT peaked in August and had been sliding lower since…

Microsoft (MSFT)

Source: eSignal

MSFT’s down move began when the Relative Strength Index (RSI) reversed from overbought territory (upper grey dashed line) around mid-August.

The 10-day moving average (MA – red line) confirmed the downtrend, crossing and accelerating below the 50-day MA (blue line).

But within that downtrend, there were two counter-rallies…

Both occurred when the RSI formed a ‘V’ and briefly bounced out of oversold territory (lower grey dashed line) – shown by ‘1’ and ‘2’ in the bottom half of the chart.

Mind you, these were not big moves. But they were enough for a nimble trader to pounce.

Let’s take another look at the chart…

Microsoft (MSFT)

Source: eSignal

With the RSI showing a similar emerging pattern (to 1 and 2) on October 12, we put MSFT on our watchlist.

Then as that RSI pattern developed, MSFT steadily rallied despite the market’s chaotic reaction to the consumer price index (CPI) print on Wednesday, October 13.

It had also been outperforming the tech sector all year, and is one of the few tech companies whose earnings growth trajectory is still rising. This makes it a winner in a rising-rate environment.

That’s why we entered a long position by buying a call option. Note that call options typically increase in value as a stock price rises.

As you can see, on that day MSFT rallied strongly – gaining 8% from its daily low. For a $1.8 trillion stock, that’s one heck of a move.

That price action saw the value of our call option increase dramatically. And given the volatility in the market, we were ready to take our profits off the table.

Taking Profits

On October 14, MSFT opened slightly higher. And we closed out our position by selling our call option for a 59% gain.

Now to be fair, we generated this outsized return by using options.

But even if we had used shares, our return would still have been a smaller but tidy profit in such a short time.

So with a 59% gain in a single day, we banked our profits and readied ourselves for our next trade.

The thing to understand with these countertrend trades is that we’re not hunting out some huge pattern reversal. Nor are we trying to predict where a stock will be at some time in the future.

Instead, we’re simply looking for a stock that overshoots in either direction. Then we try to trade it for a profit when it reverses back the other way.

And if you’d like to take part in our next trade, I’d love to have you along for the ride. To learn more about how to join, you can go right here for all the details.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

Reader Mailbag

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