It’s been over two months since the Nasdaq peaked in July.
That huge rally saw the Invesco QQQ Trust Series 1 (QQQ) gain almost 50% from the start of the year…
And put it within just 5% of its November 2021 all-time high.
Since hitting that July peak, however, QQQ has steadily drifted lower with several counter moves along the way.
Last week we checked out how we traded one of those counter-rallies for a 21% gain in just four days.
Today, I want to run through another QQQ trade we initiated just three days later. But this time to the short side.
This trade generated a blended 74% gain in just one week for members of my options advisory, One Ticker Trader.
Moving Within a Changing Trend
In the chart below, you can see QQQ’s clear reversal after peaking in July.
The following down move overlapped with the Relative Strength Index (RSI), tracking lower from overbought territory (upper gray dashed line). This move saw QQQ drop 9% before forming a trough in mid-August.
Invesco QQQ Trust Series 1 (QQQ)
Source: e-Signal
The RSI rebounded from near-oversold territory (lower gray dashed line). This led to QQQ rallying again before peaking at a lower high at the start of September.
This clear change in QQQ’s trend (from its six-month rally) is shown by the 50-day moving average (MA, blue line) flattening out in early August.
It’s also clear in the way the 10-day MA converged with the 50-day MA and crossed it in both directions.
It was one of the small counter moves within this pattern that enabled us to make that 21% profit from our long trade in QQQ earlier this month.
But momentum continued to track lower (orange line).
This led to lower highs since making that trade, and we knew that would eventually pull QQQ lower, too.
So, when QQQ tried to counter-rally on September 14, we used that to enter a short trade and bought put options. Put options typically increase when the stock or index falls.
And, as you can see, the trade went our way right from the start. Take another look:
Invesco QQQ Trust Series 1 (QQQ)
Source: e-Signal
QQQ opened the next day lower and continued to fall. That fall carried on over the following days as the RSI tracked lower.
So, with our position in good profit, we decided to close out half of our position (“Exit 1”) on September 20 for a 41.9% gain.
When you see a big profit like that in such a short time, it can be tempting to take all your profits off the table…
But the RSI’s fall started to accelerate into its lower range (another bearish signal). So we decided to ride the remaining half of our position to see if we could lock in some extra profits.
This, again, proved to be the right call.
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QQQ continued to fall the following day, but the RSI quickly approached oversold territory. We then closed out the remaining half of our position on September 21 for a near 106% gain (“Exit 2”).
All up, that equated to a blended 74% gain in the space of a week. Compare that to the Nasdaq’s 48% rally at the start of the year which took over six months to play out.
To be clear, we generated this large return by using options. With options, we need to remember that the clock is always ticking away.
This trade also highlights that if you remain nimble, trade off the charts, and don’t lock yourself into any one view of the market, you, too, can generate outsized gains…
Whatever direction the market takes.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
Mailbag
One Ticker Trader has closed some winning trades recently. Our readers have shared some of their thoughts:
Hello just wanted to thank you for this awesome trade we just did! I was at work when you sent the first sell 1/2 alert so I didn’t get to sell till today sold all for a 100% return! My first 100% return feels good! Thank you for your knowledge! Can’t wait for the next trade!
– Emilio M.
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