How a Subtle Change in Momentum Delivered a 56% Gain

Oil and gas massively outperformed the broader market last year.

While the rest of the market was getting crushed, the Energy Select Sector SPDR Fund (XLE) went on a tear, rallying 70% in the first half of the year.

But after peaking in June, XLE soon reversed sharply, losing 30% by mid-July. It then took until November to reach its previous high.

Since then, XLE has traded in a pretty tight range. However, that doesn’t mean it hasn’t given us trading opportunities…

In fact, by trading just a small shift in momentum, we were able to generate a 56% gain in six days (including a weekend) through my option advisory service, The Opportunistic Trader.

So let’s see how we did it…

Looking for Subtle Changes

One of the key planks of my strategy is mean reversion…

I look for markets that have overshot in one direction and aim to profit when they snap back the other way.

And one of the key indicators behind this strategy is the Relative Strength Index (RSI)…

It shows when a stock or index is overbought (or oversold) – that is, when momentum is stalling and its direction is likely to reverse.

For example, in the chart of XLE below, the left red circle shows the RSI forming a ‘V’ right on oversold territory (lower grey dashed line).

As you can see, this coincided with XLE locking in its low at ‘A’…

Energy Select Sector SPDR Fund (XLE)

Source: eSignal

Then, with increased buying momentum pushing XLE higher, the RSI peaked (right red circle) in overbought territory (upper grey dashed line), while XLE locked in its high at ‘B.’

However, you don’t have to wait until the RSI is at these extreme levels to trade.

All the other ‘V’s and inverse ‘V’s represent small changes in momentum’s direction.

When we are trading on a short time scale (sometimes holding a position for only a day), these subtle changes in momentum offer opportunities to us.

And that was the case with XLE…

Earlier this month, the RSI formed a ‘V’ and trended higher (red line). And XLE held short-term support (orange line). So we entered a long position on February 7 by buying a call option on XLE.

Note that a call option increases in value when the underlying stock rises.

As you can see, the trade went our way from the moment we entered – propelled upward by the steady rise in momentum.

Take another look at the chart…

Energy Select Sector SPDR Fund (XLE)

Source: eSignal

So with our position in good profit, and XLE’s price stalling (along with a small peak in the RSI), we exited our position on February 13. We sold our call option for a quick 56.4% gain.

Now, it’s important to note that we generated this high level of return in a short time frame by using options. Options allow us to choose our risk, while amplifying our returns.

And ultimately, this XLE trade shows that you don’t always need extreme reversals to trade… With just a subtle change in momentum, we generated a profitable short-term trade.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

P.S. We’re less than two weeks away from the next “money shock” event happening on March 10… when volatility can spike as much as 20X. As traders, that means opportunity… if we know how to play it.

And in the past, I’ve had great success using this volatility to generate outsized, rapid profits. I’ve booked 89 winners – including 64 gains of 100% or more – trading these money shock dates just since the bear market began in January ’22.

To learn more, there’s still a little time left to watch my Money Shock Calendar briefing… simply go right here to watch the replay from last week’s event.

Reader Mailbag

In today’s mailbag, members of One Ticker Trader comment on their recent experiences with Larry’s recommendations…

Thanks for the QQQ trade. I was a little nervous, even at just one contract. The result was excellent. I’m looking forward to the next one.

– Allan R.

In regard to TSLA, thanks for the timely and clear trade explanation.

– Michael N.

Hi Larry, I agree with your logic. Tesla is defying gravity and the option will expire and we lose everything. Might as well grab what little is left.

One loss in a string of wins is still pretty darn amazing. Larry you are an interesting guy. I am quite amazed by you and your service. You are the real deal. I am so impressed by the wins you are finding for us.

We live in a world where we are marketed with false dreams only to see our entry fee disappear to con men. You are the opposite. You deliver on your word, and we all win. I am telling all my friends about this amazing guy and his amazing service.

Wishing you the best. Thank You.

– Livio S.

Larry, I thought the Tesla trade was a sure winner based on the run-up in valuation that had occurred prior to your alert. And thanks for the QQQ win, which generated a nice offset to the Tesla loss.

– Ron O.

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