The Invesco QQQ Trust Series 1 (QQQ) bottomed out in late October last year. Since then, it has been on a tear…
Potential rate cuts, Big Tech profits, and the AI frenzy helped push QQQ to a 47% gain earlier this month.
But despite QQQ’s big rally, there have been strong pullbacks along the way.
Two of those pullbacks generated big profits for my One Ticker Trader subscribers…
A couple of months ago, we traded the first of QQQ’s major retracements for an 89% gain.
Today, I want to share how we profited from QQQ’s current retracement.
We were slightly early with the trade. Yet we exited last week for a blended 69.3% gain.
So let’s check out how we did it…
An Overheated Nasdaq
In the chart below, QQQ retraced from March into April (when we generated our 89% profit).
But buying momentum returned, as shown by the Relative Strength Index (RSI) in the bottom half of the chart.
And QQQ resumed its longer-term rally…
Invesco QQQ Trust Series 1 (QQQ)
Source: eSignal
QQQ’s rally coincided with the RSI bullishly breaking up through resistance (green line) and into the upper half of its range.
Plus, the 10-day moving average (MA, red line) accelerated above the 50-day MA (blue line).
But in June, we saw signs that QQQ was overheating. The RSI made an inverse “V” at “A” and then tracked lower.
This saw QQQ pull back briefly before a rising RSI pushed it higher again.
The RSI jumped well into overbought territory once more. And it looked likely to pull back again.
So we entered a short position on July 3 by buying a put option. (A put option increases in value when the underlying stock falls.)
But it wasn’t just the QQQ chart that triggered the trade.
Heavyweight stocks like Nvidia and Apple had run into solid resistance and looked vulnerable to a pullback.
At the time, we saw similar patterns forming in Amazon, Meta, Netflix, and Microsoft too…
Plus, the much-anticipated rate cuts had been continually pushed back due to persistent inflation and strong economic data.
Yet even with all these factors in play, we entered our trade a little too early…
Instead of turning lower, the RSI recovered and rallied, sending QQQ higher too.
Then the RSI formed a lower high at “B” (orange line).
When the RSI tracks lower like this (while QQQ rallies), we know that it will eventually pull the stock price lower too.
And that’s what we saw…
Take another look:
Invesco QQQ Trust Series 1 (QQQ)
Source: eSignal
The RSI fell back toward support (green line). And it pulled QQQ down with it too.
That put our position back into the green.
Our position was in good profit when the RSI tested support. So we closed out half our position on July 18 for a 63.5% gain.
We left half our position open to capture any further move down. That turned out to be the right call.
Our position went further into profit. But momentum appeared to be rebuilding, so we closed out the remainder of our position the following day for a 75% gain.
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Together, that resulted in a blended 69.3% gain in a little over two weeks.
As you can see, options can magnify returns compared to just trading shares.
Yet options have a finite life. Time decay always eats away at an option’s value.
If the planned move doesn’t come off, and you hold your option to expiration, your position can expire worthless.
But that’s the risk you take to generate these outsized gains.
And as this trade shows, options can help you trade reversals against a major trend for handy profits… even if you don’t always time your entry exactly right.
Happy trading,
Larry Benedict
Editor, Trading With Larry Benedict