Managing Editor’s Note: Buckle up… because according to our colleague, tech investing legend Jeff Brown, Elon Musk is about to trigger another massive wave of disruption in the markets.
If you’re holding the wrong stocks, you could lose big. But if you know what to do, you could walk away with gains of up to 287%, 476%, and 874%… in 30 days or less. Jeff will give you all the details during a strategy session on Wednesday, April 8, at 2 p.m. ET. Go here to sign up to attend for free with a single click.
I often tell folks about the importance of being nimble. It’s been a key part of my 40-plus year trading career…
I focus on pulling smaller but regular profits out of the markets. Do that consistently over time, and you’ll be surprised just how big your trading account will grow.
One of the mainstays of nimble trading is to avoid having a predetermined view of the market. As we discussed on Wednesday, you don’t want to let a bullish or bearish view dictate your trades.
Instead, the key is to look for strong trade setups in either direction. Then quickly and clinically take those profits off the table. We saw how that works earlier this week, when my Opportunistic Trader members had the chance to pick up an 18.9% gain in a day.
So today, let’s see how that trade played out…
Home improvement giant Home Depot (HD) had a really strong start to the year. Yet it, along with the rest of the market, rolled over and sank as hostilities in the Middle East broke out.
Rising oil prices fuel inflation, which in turn puts pressure on interest rates and consumers’ wallets. HD fell heavily, losing 19.5% (peak to trough) in less than two months. Check out the chart…
Home Depot (HD)
Source: eSignal
You can gauge the sharpness of that fall by the rate at which the 10-day moving average (MA, red line) crosses below the 50-day MA (blue line).
If we followed the bearish news and let that dictate our actions, we would have missed out on a tidy profit.
See, I look for stocks that have sold off too far, too fast… I aim to profit when they snap back the other way. And that’s what we did here…
As you can see in the bottom part of the chart, the Relative Strength Index (RSI), a momentum indicator, formed a “V” and rallied from oversold territory (lower gray dashed line). That coincided with HD’s low on March 20. Then the RSI formed a higher low (green line) – a bullish signal indicating buying momentum was building.
To capture an anticipated up move, we bought a call option. A call option typically increases in value when the underlying stock rallies.
As you can see, we got our timing spot on… Take another look:
Home Depot (HD)
Source: eSignal
The next day, HD continued to rally. However, the strength of that move petered out – and this is why being nimble is so important. With our position in good profit, we didn’t want to risk handing back any gains. We exited our position on April 1 by selling our call option.
We bought our HD call option on March 31 for $3.30 per contract (or $330, as an option contract is for 100 shares). Then we sold it the next day for $3.93 (or $393).
That handed us an 18.9% gain in just a day.
We generated this tidy profit using options. Because options use leverage, they magnify profits and losses. That’s how a small move in the stock can lead to a double-digit gain (or more).
Yet you have to get your timing right because options expire. So you run the risk of your option expiring worthless if your anticipated move doesn’t pan out in your time frame. (You can always close your position early if you wish.)
And we didn’t need a longer-term view on HD to succeed with this trade. Instead, we simply took advantage of an overstretched move.
That’s the value of trading this way when markets feel uncertain. You can profit from short-term moves without the need to predict which way the market is headed next.
Happy Trading,
Larry Benedict
Reading Trading With Larry Benedict will allow you to take a look into the mind of one of the market’s greatest traders. You’ll be able to recognize and take advantage of trends in the market in no time.
