67%…

That’s the gain subscribers of One Ticker Trader netted in less than a week.

And it all had to do with a distortion in some of the biggest market indexes.

At the end of 2023, the S&P 500, Dow Jones, and Nasdaq were all experiencing an incredible rally.

In November alone, the S&P 500 and Dow Jones rose nearly 9% in a month. The Nasdaq was up over 10%.

But in 2024, one index began to lag.

Coming into the end of May, the Nasdaq and S&P 500 were up 10.6% and 10.7%, respectively, year-to-date (YTD).

Yet the Dow Jones was barely trading flat. It was just 1.2% higher YTD.

That was the perfect scenario to put my trading strategy to work.

So let’s check out today how we did it…

Look for Reversals

Often, traders watch an index in isolation.

They look at its fundamentals and price chart to gauge whether it’s a “buy” or a “sell.”

But I’ve always done things slightly different…

While I do use charts, I like to watch how one index tracks in relation to others.

I watch to see if one is overstretched by comparison… and vulnerable to a reversal.

That can provide a great setup for a potential trade.

We call this kind of strategy “mean reversion.”

That’s because stocks can act like rubber bands. If one stretches too far to the upside or downside, it tends to snap back in the other direction.

And that’s what I looked for here…

Both the S&P 500 and Nasdaq were up strongly for the year, but the Dow Jones was straggling.

So I was looking for the SPDR Dow Jones Industrial Average ETF Trust (DIA) – an exchange-traded fund that tracks the Dow Jones – to snap back toward the other two indexes.

In other words, DIA would play catch-up.

I also needed to see a strong technical setup before committing to a trade.

And that’s where the chart comes back into the picture…

SPDR Dow Jones Industrial Average ETF Trust (DIA)

Source: eSignal

DIA peaked and reversed from its May 16 all-time high at “A”…

That coincided with the Relative Strength Index (RSI) reversing from overbought territory. It dropped into the lower half of its range (below green line).

When momentum reverses and falls like this, it pulls the stock down with it too…

But DIA looked like it had overshot the downside. The RSI formed a “V” (red circle) and bounced from near oversold territory.

That’s when I decided it was time for a trade.

I recommended buying a call option on DIA on May 30. A call option increases in value when the underlying stock rallies.

As you can see on the chart, we got our timing exactly right…

DIA rebounded higher the following day. That put our trade into good profit.

DIA opened up higher the day after that, but momentum was slowing. So I recommended banking some profits by closing half our position for a 55.4% gain.

Our remaining half position would enable us to catch any further upside. And that played out.

Take another look:

SPDR Dow Jones Industrial Average ETF Trust (DIA)

Source: eSignal

Subscribers closed out the rest of the position for a 78.5% gain on June 4.

That resulted in a blended 67% profit in less than a week.

Magnifying Our Returns

Options are one of my favorite ways to make these kinds of gains. I’ve used them throughout my 40-year career in the markets with great success.

That’s because they can really magnify our returns when we get the move right.

That’s how we made 67% in under a week. Yet the Dow Jones only rallied 1.8% over the same period.

The important thing is to identify momentum reversals that can provide the setup for a quick mean reversion trade – just like we did here with DIA.

Remember, we’re simply looking for something that has overshot in one direction.

And we aim to profit when it snaps back the other way.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict