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A 22%-plus return in a year?
Most investors would take that in a heartbeat – especially after the tumultuous ride stocks have had since the start of the year. Yesterday alone, global markets fell sharply following the latest aggressive round of tariff announcements.
Despite the chaos, traders have been pulling in these kinds of returns on a frequent basis.
In fact, not only did my subscribers generate a 22%-plus return in a day… they did it twice in a week.
That’s because we’ve been on the hunt for “mean reversion” signals. When a stock moves sharply in one direction, it’s only a matter of time before that move becomes overstretched. That’s often when the stock snaps back the other way.
And when those reversals happen, we snag our profits…
Exhausted Sellers
One of those wins came from leading chipmaker Nvidia (NVDA)…
NVDA has been trending lower since the start of the year. Its low on Monday represented a 32.3% fall from its January high.
My subscribers capitalized on that down move by picking up gains of 25.6% and 46.9% along the way.
But that down move seemed overstretched coming into this week. So I was looking to profit from a potential reversal…
Nvidia (NVDA)
Source: eSignal
For a start, we saw momentum starting to rise. That’s shown by the Relative Strength Index (RSI) in the bottom half of the chart (red circle).
When the RSI rallies, it often leads to a stock rebounding higher.
Plus, the daily price action showed that sellers were becoming exhausted…
After gapping lower on the day of our trade, the down move soon faded out. NVDA then reversed sharply, filling in the gap. It continued to rally, so we bought a call option to profit from the move. (A call option should increase in value when the underlying stock rises.)
And as you can see, we got our timing spot on…
That buying momentum carried over into the following day. That enabled us to pocket a 22.6% gain.
In this market, you’ve got to take your profits when you see them. Markets can just as quickly reverse the other way, turning an otherwise profitable trade into a loser.
Then we turned to our next trade…
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An Overdone Move
We used the same approach with the SPDR S&P Homebuilders ETF (XHB). After peaking in December last year, XHB had been stuck in a downtrend.
And much like NVDA, we were able to profit along the way…
In January, my subscribers grabbed a 48.2% gain when XHB rallied against the prevailing downtrend. Then we brought in a 97.7% gain when it rolled over and headed lower.
But that move looked overdone as we came into this week. So we again prepared to capture a bounce…
SPDR S&P Homebuilders ETF (XHB)
Source: eSignal
XHB had made lower lows throughout the last month. Meanwhile, the RSI had started to trend higher (red line).
When buying momentum pushes higher like this, that will eventually halt a fall and drive the stock up.
That’s what we wanted to see with our trade.
XHB initially gapped lower on the day we opened the trade. Yet sellers soon dried up. XHB reversed and rallied throughout the day, so we bought a call option to benefit from that rising momentum.
We sold our call option the next day for a 22.1% gain.
To be clear, we generated these returns in just a day using options. Because options use leverage, they magnify both profits and losses. And because options expire, you’ve got to get the move you’re looking for in good time.
But as these two trades show, being nimble and waiting for the right setup can help us turn market chaos into solid profits.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict