How a 5% Move Set Up a 50% Gain

After a particularly bruising 2022, tech investors enjoyed a much brighter start to 2023.

As soon as we rang in the new year, the Invesco QQQ Trust Series 1 (QQQ) began its rally.

In just under a month, QQQ rose an impressive 20%. And this lulled bulls into hoping an even bigger move was coming.

However, that surge put QQQ into overbought territory. On February 2, QQQ topped out and started to reverse.

After drifting lower, QQQ rallied 5% against the prevailing downtrend in early March. But it was mostly a technical bounce. Once again, QQQ looked overbought after that move.

So, we did a mean reversion trade to the downside in my options advisory service, One Ticker Trader. And this enabled us to generate a blended 49.9% gain in just three days.

Today, I’ll show you how we did it…

Finding a Strong Setup

On the chart below, you can see the short-term support (orange line) that QQQ bounced off to rally at the start of 2023.

Then, the Relative Strength Index (RSI) rose from oversold to overbought territory (lower to upper grey dashed line) before reversing (left red circle).

In February, the RSI tracked even lower, dragging QQQ down with it.

Check out QQQ’s chart…

Invesco QQQ Trust Series 1 (QQQ)

Source: eSignal

After jumping 5% in just a few days in early March, QQQ looked overbought and vulnerable to a pullback.

And sure enough, the RSI reversed lower, showing a decline in momentum (right red circle). Plus, with the pending release of important job numbers later that week, it was unlikely the market would keep bidding QQQ higher.

Although mean reversion is a big part of our strategy, we’re not restricted to trading reversals from overbought or oversold territory. We can also trade subtle changes in momentum within those ranges.

So on March 6, we entered a short position on QQQ by buying a put option. A put option increases in value when a stock or index falls.

As soon as we entered the trade, it went our way. And the following day, Fed Chair Powell’s hawkish testimony boosted our position even more when he announced the pace of rate hikes would increase if needed.

So with our position in good profit, we closed out half of our puts on March 9 for a 30.6% gain.

Take another look at the chart…

Invesco QQQ Trust Series 1 (QQQ)

Source: eSignal

After taking that profit, QQQ continued to fall, putting our remaining position even further into profit. So we closed out the remaining half of our position on the same day (March 9) for a 69.1% profit.

Because we traded options instead of stock, our returns were higher. Altogether, we made a blended 49.9% gain in just three days.

This trade proves that we can still find highly profitable trades in a short time – even from small moves like this 5% rally against the major trend.

That’s what we aim to do every month in One Ticker Trader. If you’d like to learn more – including how to join us – you can find more details here.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

Reader Mailbag

In today’s mailbag, a subscriber thanks Larry for their positive experience with The S&P Trader…

I walked the tightrope with you today. I almost lost my balance, but you kept me upright and delivered me to the other side. I’m up $8,000! Bless you!

– David A.

Thank you for your thoughtful comments. We look forward to reading them every day at [email protected].