How We Pulled a 97.7% Return in This Declining Sector

By Larry Benedict, editor, Trading With Larry Benedict

Ever since the election, investors have tried to anticipate the impact of President Trump’s tariffs.

But even before tariffs were announced, one sector was already feeling the pain… The SPDR S&P Homebuilders ETF (XHB) lost around 20% from its late November 2024 peak.

As we discussed last week, the mortgage rate has more than doubled since 2020 (from 2.65% to 6.95%). Plus, the median new home price is near all-time highs (around $427,000). These factors make it hard for would-be buyers.

But the real knockout punch will hit when tariffs come into effect. That’s because they will impact the cost of building materials – many of which come from Canada and Mexico.

That will put XHB under even more pressure going forward.

Yet even in downturns, we can take advantage. Today, I want to share how we used XHB’s declining share price to bag a 97.7% gain.

So let’s check out how we did it…

A Near Double

The chart of XHB below shows its late November peak…

It rolled over and tracked lower as the Relative Strength Index (RSI) reversed from overbought territory (upper gray dashed line).

XHB steadily declined as the RSI slid into oversold territory (lower gray dashed line)…

SPDR S&P Homebuilders ETF (XHB)

Source: eSignal

(Click here to expand image)

Then a converging pattern indicated that a reversal higher could be in the cards… XHB drifted lower (upper red line)… but the RSI did the opposite (lower red line).

When momentum rises like this, it will eventually push the stock higher too.

And XHB burst higher in the middle of January until it hit resistance later that month.

As the chart shows, that relief rally ran out of steam when XHB hit the 50-day Moving Average (MA, blue line).

Plus, the RSI was hovering around the 60% level. In normal conditions, the 70% level marks overbought conditions. Yet in a downtrend, 60% can often act as an overbought level.

So we bought a put option on January 21 to benefit from a potential reversal. Put options can gain value when the underlying stock falls.

As you can see, things didn’t immediately go our way. XHB tested the 50-day MA twice more before declining buying momentum pulled XHB lower.

Then XHB gapped lower once tariffs were announced.

Take another look:

SPDR S&P Homebuilders ETF (XHB)

Source: eSignal

(Click here to expand image)

That turned an already solid trade into a much bigger winner. So we closed out the trade by selling our put option on February 3 for a 97.7% profit.

That’s a tidy gain… and our exit timing was spot on. XHB rallied when Trump announced a 30-day suspension of those tariffs. Had we held on, we would have handed back a portion of our gains.

All said and done, this is why options are one of my favorite tools for trading.

We don’t have to wait for stocks to rise because we can profit even in a downtrend.

And by looking for resistance around the 50-day MA and fading momentum, we banked a near double in less than two weeks.

Rest assured, with more tariffs potentially coming into play, we’re going to see more trading opportunities ahead in many sectors.

And we’ll be keeping an eye out for more XHB moves this month in One Ticker Trader. So if you’d like to get in on the next trade, you can learn how to join us right here.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict