How We Made Nearly 70% by Going Long in a Downtrend

One stock that felt the full wrath of the market last year was Tesla (TSLA)…

It was caught up in the broad rout that hit tech stocks. It also had the added pressure of its founder and CEO Elon Musk offloading big chunks of his holdings.

In just 14 months, Musk sold around $40 billion of Tesla stock.

That selling in Tesla accelerated in the last few months of last year… And from September to December, Tesla lost around two-thirds of its value.

When investors see huge drops like this, they’ll usually give the stock a wide berth…

However, by being nimble and using TSLA options instead of shares, we generated an aggregate return of 67.5% in just six days for members of my advisory, One Ticker Trader.

What’s more, we achieved this result by trading against the prevailing trend…

Trading the Counter-Rally

On the Tesla chart below, you can see the huge down move starting in September…

The downtrend coincided with the Relative Strength Index (RSI) breaking below support (green line) and getting stuck in the lower half of its range…

Tesla (TSLA)

Source: eSignal

Adding to the bearish sentiment, the 10-day moving average (MA – red line) also broke below the 50-day MA (blue line) in September with both then continuing to track lower.

However, even in this downtrend, you can see multiple counter-rallies… Two in October and then another two in November.

Not big ones, mind you, but enough of a move to pick up a quick and tidy profit.

But we’re constantly on the lookout for these kinds of quick, sharp countermoves at One Ticker Trader.

And so with Tesla overshooting to the downside in late December, it went on our shortlist for a potential long trade.

Finding the Right Signal

The technical indicator we used to help determine our trade was the RSI… it went a long way into oversold territory (lower grey dashed line) in late December.

After forming a ‘V’ and then trending higher (orange line), the RSI’s higher lows showed increasing buying momentum. Soon after, we entered a long position on Tesla by buying call options.

(Note that a call option increases in value when the stock price rises.)

With Tesla trading higher the following day and our position already very profitable, we closed out half of our position for a 42.2% gain.

Take another look…

Tesla (TSLA)

Source: eSignal

The reason for closing half our trade was twofold…

1. As a trader, I’m happy to bank that kind of profit when it’s on the table, especially in such a short period of time.

2. But with Tesla holding a key short-term level, I also wanted to keep some long exposure.

And as it turned out, things played out our way…

On January 9, we closed out the remaining half of our position for a 96.7% gain. Between the two halves, that works out to an aggregate gain of 69.5% over six days.

To be clear, we generated this high level of return using options. Had we used shares instead, it would have still represented a strong result in a short time, but our return would have been less.

Either way, the thing to remember is that we’re not trying to jump onto some new emerging trend. Nor are we trying to predict where a stock will be trading way out into the future.

Instead, we’re looking for stocks that have overshot in either direction. We then aim to profit when it reverts the other way.

And if you’d like to join us as we continue to look for these kinds of trades, you can learn how by going right here.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

Reader Mailbag

In today’s mailbag, a One Ticker Trader member shares how she made a profit…

Hi, Larry.

Once again, you’ve scored another hit. I wasn’t able to buy when you recommended. In fact, I bought after you recommended to sell half. I bought at $4.07 AND $3.75. I sold half ($8.09) soon after the market had opened up (100% profit).

I was anticipating your “sell recommendation” when I saw the price hit a neckline. Unfortunately, I moved away from my monitor to have a bite to eat. When I came back, I saw your sell recommendation. I immediately sold my other half position for $8.46. So, I made a profit of 111.64%. Thank you very much for the recommendation.

I think I subscribed to your services in September 2022, but I wasn’t able to participate until October, as I could not find a broker that would allow me to trade options. Your first recommendation I followed was QQQ.

Due to difficulties in acquiring the asset, I eventually opened my position at $2.52 (blessing in disguise from your original recommended price). I sold that at $6.23. Hence, after charges, I made a profit of 145.79%. This really gave me the boost that I was looking for. Well done, Larry!

– Kim T.

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