How Much More Is There to This Correction?

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Our View

The Nasdaq is up 28% since the beginning of the year and the Dow is up 2%. Do you really think it's going to stay that way? I don't.

July is one of the best months of the year, but the ranges have become extremely narrow and choppy. As my friend Jeff Hirsch of Stock Trader’s Almanac recently noted:

“July historically is the best performing month of the third quarter, however the mostly negative results in August and September tend to make the comparison easy…Such strength inevitability stirs talk of a ‘summer rally,’ but beware the hype, as it has historically been the weakest rally of all seasons.”

Global central bankers meet this week in Portugal for the European Central Banks annual forum, while inflation figures for the US and Eurozone are out later this week. Combined, these events seem to be weighing on the markets. Traders will be watching for clues for the path of interest rates around the world — especially after Fed Chair Powell said the Fed’s rate hikes are not over.

MiM and Daily Recap

The ES sold off down to 4375.75 on Globex and traded 4383 on Monday’s open. After the open, the ES rallied up to 4403 at 9:49, pulled back to the 4393.75 and then sold off down to 4380 at 10:41. After the low, the ES rallied back up to 4393.50 at 10:53 and then traded back down to a new low of 4279 at 11:22, rallied back up to 4389.25 at 12:02, dropped down to 4372.75 and rallied back up to 4383.50 at 1:32. The ES pulled back down to 4373.75 — a higher low — and then rallied up to 4385.75 at 3:23 — a higher high.

From there, it went straight down to 4371.50 at 3:49 and traded 4274.25 as the 3:50 cash imbalance showed $3.6 billion to sell and traded 4371.25 on the 4:00 cash close. After 4:00, the ES traded down to 4368.50 and traded 4374.75 on the 5:00 futures close, down 14.25 points or -0.32% on the day.

In the end, it was exactly like I said in the lean: two-way flow. In terms of the ES's overall tone, it was a total chop-shop. In terms of the ES's overall trade, volume was higher than I expected at 1.56 million contracts.

Technical Edge

• NYSE Breadth: 63% Upside Volume

• Advance/Decline: 48% Advance

• VIX: ~$14.25

  • Traded a recent low of $12.73. That’s the lowest it’s traded since pre-pandemic in early 2020 (i.e. with stocks at ATHs)

Yesterday the S&P fell 0.45%, while the Nasdaq fell more than 1%. However, we had 50/50 upside breadth on the Nasdaq and more than 60% upside breadth on the NYSE.

In other words, most of the market did pretty well on the day — except mega-cap tech.

Mega-cap tech has been the main driver for US index gains so far this year. However, FAANG + MSFT, NVDA and TSLA all fell yesterday. In fact, of that group, Apple was the best performer with a 0.76% decline.

It’s the only name of those 8 stocks — which combine for a total market cap of ~$10.8 trillion — that fell less than 1% yesterday, while five components of that group fell by more than 2.25% (and four of them fell by more than 3.25%).

In other words, Market Caps Matter, at least when it comes to the indices.

*will send a note on MSFT and TSLA pre-open.

S&P 500 — ES

While this reset has the potential to unravel, I like the ES inching closer to the 4440-4450 zone. While the 21-day moving average is pushing through this zone now, it contains the prior breakout area and the 78.6% retrace of the rally.

If we get there, odds favor the buyers stepping in — at least for a bounce.

• Upside Levels: 4400, 4426, 4435, 4450

• Downside levels: ~4360, 4345-50

Open Positions

Down to Runners in GE, CAH, LLY, ABBV, AAPL, MCD & BRK.B. Now Add META, AVGO, UBER, CRM, AMZN and CVS.

4 longs, 2 shorts.

1. PYPL — short from about $68 — trimmed at $67 and $66. Should be done to about ½ position with a break-even stop. $64 to $65 is the next trim spot.

   1. Not exactly how I drew it up in regards to “reward” but profit is profit in this case.

2. WMT — long from $154 — Trimmed ⅓ trim at $156 to $156.50,

   1. Trim more down to half at $156.35+, ideally $157+. Break-even stop

3. FSLR — short from $189 — trimmed ⅓ or more (about 40%) at the $183.50 gap fill, traded sub-$177, so another trim down to roughly ⅓

   1. Can keep a break-even stop, but down to runners into yesterday’s low made sense, as we did note we were looking to “save some” of the position in the event of a potential “puke” down to ~$175.

   2. Got pretty close. Exit the rest or get down to runners if we retest Monday’s low.

4. INTC — Long from $33.75-ish, added some at $32.10. We never add, but as mentioned on Friday, “In hindsight, ~$32 was a better buy spot than $33.50-$34.”

   1. Got an excellent opportunity to trim INTC yesterday above our Cost Basis as it traded as high as $33.99 (that’s above even our initial entry). “Trim Note” below:

      1. I would trim down to ½ at or above our cost basis. I am really a big proponent of managing risk and I don’t care what it does to “skew” our numbers/results. Why trim? Because the position was larger due to the add and because our AMD position triggered on Friday.

   2. Stop at $31.75 hard. Can trim/exit on a push back to $34 and consider it a “kick save” on the position. Those who stick with it, $34.50 to $35 is the next profit target.

5. AMD — long from ~$109, the gap-fill and 10-week ema. $107 stop. Ideal target is $115 to $116, but feel free to trim ¼ or so beforehand.

   1. Traded as high as $112.50.

6. DOCN — ½ position* at $38.25 — Tight stop would be ~$37. Loose stop would be ~$36. Ideally we want to at least see the gap-fill near $41, but $39.75-$40+ is acceptable for ¼ trim.

Go-To Watchlist

Feel free to build your own trades off these relative strength leaders

Relative strength leaders → (List is growing long!)

Economic Calendar

Disclaimer: Charts and analysis are for discussion and education purposes only. I am not a financial advisor, do not give financial advice and am not recommending the buying or selling of any security.

Remember: Not all setups will trigger. Not all setups will be profitable. Not all setups should be taken. These are simply the setups that I have put together for years on my own and what I watch as part of my own “game plan” coming into each day. Good luck!