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Investors have become increasingly confused since the Nasdaq peaked in July.
They’re not sure if they should “buy the dip” and hold on tight or sit on the sidelines instead.
It’s a common issue when there’s so much going on.
But you can still make good money if you ignore the noise and focus on the basics. You just need to have a proven strategy and stick to it…
We’ve been able to successfully trade the Invesco QQQ Trust Series 1 (QQQ) in both directions since it rolled over on July 19.
On September 18, I ran through a long counter-trend trade that generated a 21% gain in four days.
Then on September 25, I ran a short QQQ trade that generated an even bigger 74% blended profit in just a week.
Today I want to continue this theme by looking at another profitable QQQ trade that we closed out last week for members of my options advisory, The Opportunistic Trader…
Looking for a Repeat
On the chart below, you can see where QQQ peaked at “A.”
Then the relative strength index (RSI) reversed from overbought territory (upper gray dashed line). This caused QQQ to fall and make a lower high (left orange line).
This pattern shows declining momentum…
Invesco QQQ Trust Series 1 (QQQ)
Source: e-Signal
The RSI made a similar pattern (middle orange line), but around the support line (green line), when QQQ made a lower high at “B.”
In September, when the RSI rallied out of near-oversold territory (lower gray dashed line), we braced for another potential repeat of those reversal patterns.
But it wasn’t just the RSI making another inverse “V” and trending lower (right orange line) that set us up for a short trade earlier this month…
On October 6, a strong jobs report (non-farm payrolls)showed a powerful rally from QQQ.
Then, after a brief dip the following Monday, QQQ continued to climb without any real pullback for several days.
But inflation figures were due out and the earnings season was about to kick off. That meant there was a growing risk that traders were getting ahead of themselves and bidding QQQ up too high.
Remember that we’re looking for stocks that go too far in either direction. Then we profit when they reverse back the other way…
So, on October 11, we took out a short position by buying a put option. (Note that a put option should increase when the underlying shares fall.)
Despite initially trying to rally, QQQ closed lower the following day…
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Then QQQ traded sharply down on October 13. With this knowledge, we closed out half our position for a 29.6% gain– a tidy profit in just two days.
We decided to hold the remainder of our position to see if we could lock in some even bigger gains.
But this time things didn’t go our way…
QQQ drifted slightly lower over the following days. Due to lower volatility and further time decay, we closed out the rest of our position for a 12% gain on October 18.
It’s still a profit, but less than if we’d closed out all of our positions back on October 13.
While it wasn’t quite what we hoped for, we still reached a blended gain of 20.8% despite the uncertainty we encountered during the week.
As always, I need to be clear that we generated this return using options. Given their leverage, this can exaggerate both gains and losses.
But this trade shows, yet again, that if we’re nimble and stick to our game plan we come out ahead. With this strategy, we can readily bank profits while others are scratching their heads.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
Mailbag
The readers at One Ticker Trader have been seeing results:
Larry, the latest SPY puts trade was the bomb! Up 24% in two days?! You are the real deal, Sir.
– Marc G.
Larry, there are a lot of folks offering “advice” on when and what to buy and sell in the markets. Sometimes they’re right, but mostly they promise lots and deliver little. You, on the other hand, are doing the reverse. From what I’ve seen, you offer careful, accurate guidance. I just want you to know how much your work is appreciated.
– Alan N.
Are you profiting, too? Let us know at feedback@opportunistictrader.com.