How This Strong Setup Netted Us an 89% Gain

The Invesco QQQ Trust Series 1 (QQQ) rallied at the beginning of the year.

QQQ regularly made new all-time highs. And by early March, it was up around 30% from its October 2023 low.

But I warned my subscribers that QQQ was vulnerable to a pullback.

Three members of the Magnificent Seven – Apple, Tesla, and Alphabet – had been languishing.

Plus, the widely anticipated rate cuts had driven much of the rally. But traders worried that the Federal Reserve would push them much further out (as has now happened).

So once the right setup presented itself, we bought a put option in my One Ticker Trader and Opportunistic Trader services. (Note: A put option increases in value when the underlying stock or index falls.)

And it turned out to be the right call. This trade generated an 89% gain.

Let’s take a closer look…

This Reversal Pattern Led to Profits

In the chart of QQQ below, you can see its strong uptrend that carried over from 2023.

The 50-day moving average (MA, blue line) steadily climbed, with the 10-day MA (red line) tracking above it. That’s a bullish signal.

Additionally, the Relative Strength Index (RSI) stayed in its upper band (above the green line). That showed positive buying momentum.

Invesco QQQ Trust Series 1 (QQQ)

Source: eSignal

But one of the reversal patterns I look for is a divergence between a stock price and the RSI. And that’s what we saw here.

QQQ was making higher highs. Yet the RSI was declining (orange line) from overbought territory (upper gray dashed line).

When momentum declines, it will eventually pull the stock lower too.

The moving average convergence/divergence (MACD) also showed divergence. It rolled lower despite QQQ making those highs.

QQQ then reversed strongly off its high on March 8. That provided an entry point for the trade.

As the chart shows, the trade initially went our way.

But the Fed confirmed on March 20 that it was still on track for three cuts later this year. That caused QQQ to rally. And it briefly put us behind on the trade.

But that rally was short-lived.

Both the MACD and RSI were still falling. And QQQ soon rolled over and headed down.

That down move gained further traction along with three key bearish signals…

1. The RSI fell through support (green line) and into the lower half of its range.

2. The 10-day MA crossed and accelerated below the 50-day MA.

3. The blue MACD line led the orange signal line below the zero (0.00) line.

Our position was in good profit. But the RSI touched oversold territory and bounced. So we closed out our position by selling the put option on April 19.

Take another look:

Invesco QQQ Trust Series 1 (QQQ)

Source: eSignal

The trade generated an 89% gain with a holding period of 42 days.

And by waiting for the right setup, we generated our members a solid gain even during a choppy period in the market.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict