Being Nimble Handed Us a 21% Gain

After rallying 48% from its January lows, the Invesco QQQ Trust Series 1 (QQQ) topped out in mid-July.

First there was the Nasdaq rebalance, when the index made sure it wasn’t overweighted in its top companies. Some mixed earnings from market heavyweights like Apple (AAPL) and Microsoft (MSFT) followed.

Altogether, we saw QQQ drop around 9% in a month.

Since then, QQQ has struggled for direction. Market sentiment seems to change nearly every other day.

This type of “blow-off” after a huge run-up can be confusing for a lot of traders. This is especially true if they have a firm view of which direction the market should be heading.

But by being nimble and not locking yourself into one viewpoint (bullish or bearish), you can profit from trading in either direction.

Just like we did recently with QQQ.

Members of my One Ticker Trader service picked up a 21% gain in just four days by trading a countertrend bounce.

Today, I want to share how we did it.

Watching Key Levels

On the chart below, you can see that buying momentum had already started to track lower before QQQ peaked on July 19.

Invesco QQQ Trust Series 1 (QQQ)

Source: eSignal

While QQQ was making higher highs (upper orange line), the Relative Strength Index (RSI) was tracking lower from overbought territory (lower orange line).

QQQ’s fall accelerated as the RSI continued below support (green line) and into its lower band.

But that move overshot to the downside. So a reversal in momentum (red line) saw QQQ lock in its low at ‘A’ and start trending higher.

From there, QQQ rallied up to ‘B’ before rolling over again.

Each of these moves and countermoves would have sorely tested a trader with a one-directional view of the market.

And it likely would have stopped them out of their trades.

But remember that we’re not trying to work out where QQQ will be next month or next year.

Instead, our goal is to look for overextended moves in either direction. Then we can profit when they snap back the other way.

So with QQQ falling back off its lower high at ‘B,’ we saw that QQQ would soon retest and could bounce off its 21-day Moving Average (MA, blue line). This is a level that traders widely watch.

That would coincide with the RSI testing support (orange arrow) – another setup that could also help QQQ bounce.

However, beyond these technical signals, there was another short-term, temporary dynamic driving the market…

Don’t Trust the Headlines

AAPL had tanked off reports that China banned iPhone sales to government staffers. Given its huge weighting in the Nasdaq, that had added to QQQ’s fall.

But even if that story was correct (it has since been disproven), it would have only represented around 1-2% of AAPL’s iPhone market in China.

This means that the market vastly overreacted to the news.

So we entered a long position in QQQ by buying a call option on September 7. A call option should increase in value when the underlying stock rises.

And as you can see on the chart, our timing was spot on.

Take another look:

Invesco QQQ Trust Series 1 (QQQ)

Source: eSignal

From the moment we entered our position, it started going our way.

We closed out our trade by selling our call option just four days later for a quick 20.9% gain.

As always, I want to be clear that we made this profit using options. Had we just bought the shares instead, our profit would have been less.

Yet it shows that by watching key technical levels and not getting sucked into “the sky is falling” headlines, we can quickly generate some nice, profitable trades.

As always, if you’d like to join us at One Ticker Trader and take part in our next trade, you can go right here to learn more.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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