Rubber-bands were snapping back all over the place on Monday.
The S&P 500 fell more than 100 points. It gave up all of its gains for February, and all of its gains for the year so far.
The technology sector got hit particularly hard – with shares of stocks like Apple (AAPL) and Microsoft (MSFT) falling more than 4%. The action caught a lot of traders by surprise.
It shouldn’t have.
Two weeks ago, we pointed out the Technology Sector Select SPDR Fund (XLK) had stretched too far above its 50-day moving average line. It was overbought, and there was negative divergence on several technical momentum indicators. In other words, the proverbial “rubber-band” was quite stretched.
We warned the sector was due for a break in the uptrend, and suggested we’d have a better chance to buy technology stocks in the weeks ahead.
It took about two weeks, but the sector finally snapped back. Here’s the updated chart…
XLK has come all the way back down to its 50-day moving average line. And, all the momentum indicators have returned to “neutral” territory. Traders who were looking to put money into
technology stocks two weeks ago have a much better chance to do so today.
Is the selling over? Has the tech sector hit bottom?
Frankly, I don’t know. Conditions were so overextended and so overbought two weeks ago that maybe the rubber-band needs to stretch some in the other direction.
There is no doubt, though, there’s a lot less risk to buying stocks in “neutral” territory rather than chasing them higher into overbought conditions.
It is hard – really hard, sometimes – to be patient and wait for a lower-risk setup. It is all the more difficult when it seems like the stock market goes up every day – like it did for the first three weeks of February – and when the financial television talking heads are encouraging folks to get on board… or else risk missing the move.
But, as we saw in late January, and we saw again on Monday…
The rubber-band always snaps back.
Best regards and good trading,
Today we hear from Ryan, a Jeff Clark Trader subscriber who has a question about options contracts…
Thank you for your amazing trader service and keeping the price so low to allow newbies to learn to trade options before moving on to the more expensive services.
I strongly agree with your advice on selling half my position on a 100% gain – in my case since I’m new, I’m only buying a single option. Is your advice relevant in this scenario? I’m unsure on how to sell half of one option contract.
Your reply is greatly appreciated. Thank You. Be Well.
Jeff’s note: Thank you for the kind comment Ryan. We’re glad you’re enjoying the service.
The straightforward answer is no… There is currently no way to sell half of a single option contract.
So, if you’re new to options and are trading one contract at a time, and I recommend you sell half of your position at a 100% gain, you should just go ahead and sell your full position and take the 100% gain.
Then, with the gains from that trade, you can look to potentially trade higher amounts of option contracts in the future.
Hope that helps, and thank you again for being a subscriber.
To learn more about how you can secure a 100% gain, click here to learn about my introductory options advisory, Jeff Clark Trader.
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And thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming at [email protected].