Dear Reader,
Last week, I told you that Nvidia Corp. (NVDA), the market’s biggest AI stock, was showing a 90% Money Calendar pattern starting on September 23 (yesterday).
That pattern runs through November 4 – and in Thursday’s issue, I even gave you three different ways to profit.
If you missed it, click here to get caught up.
Now, with interest rates officially on the decline, the world’s AI leaders are going to start investing even more capital to push the boundaries of what’s possible right now.
And they won’t be alone.
In fact, the entire tech sector is going to benefit from lower rates – not to mention yearly seasonal bullishness and the presidential election cycle (and another huge pattern on top of that, which I’ll get to in a minute).
The question is, which stocks are going to benefit the most?
As I told you last week, I have a special AI Money Calendar that looks at just the “true” artificial intelligence stocks in the market – about 25 in all.
The Magnificent 7 will likely continue to lead the markets higher in the near future, but there are over 750 stocks in the tech sector, all of which will likely want to leverage falling interest rates in order to grow.
So which ones do you want to focus on? How do you find the proverbial “needle in the haystack”?
Why not trade the haystack?
Here’s what I mean…
There’s No Such Thing as the “Perfect Stock”
Folks often get caught up in finding the “perfect stock” to trade or invest in.
The Mag7 stocks like Nvidia, Meta Platforms Inc. (META), Alphabet Inc. (GOOGL), Apple Inc. (AAPL), and Microsoft Corp. (MSFT) will continue to dominate headlines and TV screens. These big names grab attention and viewership for financial news outlets, but they aren’t the only tech stocks out there.
Of course, with over 750 choices, finding the “perfect stock” can feel like searching for a needle in a haystack.
So instead of stressing about finding the “perfect stock” (which, by the way, is subjective—what’s right for one investor may not be right for another), let’s shift the focus.
Think of the stocks as the needle and the broader market or sector as the haystack.
My suggestion? Focus on the haystack, or in this case, Exchange-Traded Funds (ETFs).
Trading The Haystack: ETFs
ETFs track an index or a basket of stocks/assets in specific industries or sectors, similar to an index fund. They trade just like individual stocks, and you can even trade options on certain ETFs – something I personally love to do.
I love ETFs because they offer diversityand spread out the risk. If one stock in the ETF underperforms, others in the basket can help offset it, making the ETF less vulnerable to a big drop in value compared to holding a single stock.
Trading an ETF can be just as straightforward as trading shares of stock, but it gives you much broader exposure.
And in tech, that’s exactly what we’re looking for right now.
Soif you’re bullish on tech like we are, but don’t want to pick a specific tech stock, you could invest in the Technology Select Sector SPDR ETF (NYSE: XLK).
And here’s the thing… on top of seasonal bullishness in the broader markets… and on top of the presidential election pattern… XLK is showing a 90% accurate Money Calendar pattern over the last decade between now and mid-December.
Check out the pattern:
From September 23 to December 11, XLK has risen in 9 of the last 10 years, averaging a 6.5% return during that period (make no mistake, that’s a huge move for an ETF).
This year, the trend suggests we could see a return of over 10%. Last year, XLK rose 16.6%, while the worst year was 2018 when it dropped a little over 12%.
So, what can you do with this pattern?
Sure, you could buy shares of XLK ETF now and simply hold them until December 11. But at $225 per share, a substantial position of 100 shares would cost you $22,500.
But I don’t want to tie up $22,500 for 3 months just to make 10%.
I’d rather trade options…
Trading Options on the Haystack
If you’re looking to trade options, the next step is figuring out the specific option that makesthe most sense.
Since this pattern ends on December 11, I’d look for options that expire close to that date.
For example, the XLK December 20, 2024,$225 call is trading for $11.35, which means it’ll cost you $1,135 for one contract.
To break even on this trade, you add the strike price ($225) to the premium ($11.35), giving you a breakeven price of $236.35.
If the ETF rises 10% by December 11, the stock could reach $245, which would give your $225 calls a minimum value of $20 each. If you paid $11.35 for the options, that’s a profit of $8.65 per share or $865 (before fees).
Of course, the worst-case scenario is the ETF drops, and you lose the premium you paid for the option. That’s your maximum risk.
This is just one example. There are plenty of bullish strategies you could explore based on different strike prices and expiration dates (don’t forget, the Loophole Trade is a great way to limit your risk).
The general rule of thumb for trading options on ETFs is to use a seasonal strategy to predict the average price movement over a specific timeframe.
From there, you can either buy shares or find the option that will benefit the most if the ETF moves as you expect.
Either way, you’ll avoid falling into the trap of searching for the “perfect stock.”
That’s all for today…
I’ll be back with you tomorrow to take a deep dive into the pattern on XLK, take a look at the charts, and talk more about our strategy…
Until then!
Good trading,
Tom Gentile
America’s Pattern Trader