The Re-Weighting of the Magnificent 7

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Our View

I had an interesting discussion with my very successful younger cousin Charlie Riley. His badge on the floor of the MERC was CJR. He started when he was 21 years old and retired at 44.

We were talking about investing and what to expect in the months ahead. I told him I thought the ES was going to make new all-time highs at 4900. He has always had good timing, after he sold his seat and retired, he took all the proceeds from the sale of his Merc membership and bought loads of Apple stock and held it for several years and sold a big chunk at the end of 2020 to 2021 when it was near its highs. Then he bought some quality names — stuff like TSLA, Schwab, Ford, Chevron, Pfizer, Exxon Oracle, etc. and kept part of his AAPL position.

When I talked about the S&P, he also said he doesn't buy the S&P mutual funds, he chooses his own stocks. I have a ton of respect for CJR, he's a self-made man. His parents split up and when he got out of college he moved in with his dad, but the new wife didn't treat him well and he took a crappy job and got a crappy apartment. We always got along and one day he asked me about coming to the floor and I told him it was the right move.

Five years later he had his own group of brokers in the Eurodollar futures strip, made a ton of cash and retired 23 years later.

I texted him last night and said while he did good on the floor, it doesn't get close to what he made on using that money to buy stocks. He added that he looks at the stocks he likes for weeks and months before he starts buying.

So why am I writing about this?

Because it’s hard for some people to make important investment decisions. I have always had a problem with investing in mutual funds because I have been around so many crashes. I knew the lows were in March 2020 but I froze. I asked the PitBull to do his stock list and every stock on his list — 12 to 15 names — totally exploded. Had I invested $200,000 and bought the names I would have made $2.5 million.

I guess the moral of the story is, even though you may be uncomfortable, sometimes you gotta pull the trigger if you’ve put in the work.

Our Lean

Today the Nasdaq rebalance meets the FRY-day monthly options expiration. This meeting is sure to cause big two-way flow. My gut says the ES and NQ have not made their lows yet, but Rich Miller’s — AKA @HandleStats’ — study shows that if the ES hold yesterday's low, it will set up a push to new highs. However, I'm not sure he's adding in the Nasdaq weakness from the rebalance.

Today is the largest July option expiry in history. There is over $2.3 trillion of notional options exposure expiring — including $500 billion in notional value of single stock options. Also the Nasdaq 100 rebalancing takes place at the close.

The “Magnificent 7” — MSFT, AAPL, GOOGL, NVDA, AMZN, TSLA, and META — make up more than 55% of the index. It will be the Nasdaq 100’s third special rebalance in history and when combined with the monthly expo, it should make some waves today.

Our Lean: I think it's likely we see some type of low, then a pop higher. What I don't know is will the rally hold. My gut says it won't.

I know this is long but these are post from @realTraderDave from last night. He has had a hot hand...

• Trader Dave :(8:41:32 PM): Next week will make a new high…Won't be exact:

• Trader Dave :(8:43:06 PM): https://tradechat.me/uploads/20230720084306_image.png

• Trader Dave :(8:43:33 PM): That was a fed day and AMZN earnings were after close that wednesday…Next day gap up

• Trader Dave :(8:45:39 PM): https://tradechat.me/uploads/20230720084508_image.png Marko Downgraded mkt that day. 7/27/17 (back when he was respected) and mkt sold off

• Trader Dave :(8:46:32 PM) : So next week is a huge week for earnings. MSFT and GOOGL earns on Tuesday, Meta on Wed and AMZN on Thursday

• Trader Dave :(8:47:05 PM) : We will probably make a new high mid to late week

• Trader Dave :(8:47:56 PM) : this one from 2013: https://tradechat.me/uploads/20230720084756_image.png

• Trader Dave :(8:48:05 PM) : watch the 10 day ma. You want to buy below that if can

• Trader Dave :(8:49:09 PM) : We ended the wave 3 on Wed at our target 4610. We still have a wave 5 coming next week and ito AAPL earns week and jobs

• Trader Dave :(9:08:18 PM) : once rebalance done I think we pop into the big boys next week

MiM and Daily Recap

The ES traded down to 4579.25 on Globex and opened Thursday's regular session at 4584.25. After the open, the ES traded down to 4581.75, rallied up to 4594.25 and that's when I posted this in the MTS room:

• Dboy :(9:58:23 AM): going to flush

Over the next 42 minutes the ES sold off down to 4570.75 at 10:40. After the low, I put this out:

• Dboy (10:42:03 AM): feels like its bounce time

The ES traded above the VWAP up to 4590.75 at 12:18 and then sold off down to 4576, did a sideways to lower back-and-fill and then sold off down to 4563.50 at 2:30. From there, it up-ticked to the 4570.50 area and then dumped down to a new low at 4557.25 and traded back up to 4565.50 at 3:45. The ES traded 4562.50 as the final 3:50 imbalance showed $183 million to buy, rallied up to 4566.75 at 3:54 and traded 4566 on the 4:00 cash close. After 4:00, the ES traded up to 4568 and settled at 4566.25 on the 5:00 futures close, down 30.75 points or -0.67% on the day.

In the end, the 'Nasdaq Rebalance' weighed heavily on the index markets, while the NQ’s 2.27% decline outpaced its peers. In terms of the ES’s overall tone, it was weak but not as much as the NQ was. In terms of the ES’s overall trade, 221k traded on Globex and 1.238 million traded on the day session for a total of 1.459 million contracts traded.

Technical Edge

• NYSE Breadth: 42% Upside Volume

• Advance/Decline: 40% Advance

• VIX: ~$14 — showing no panic whatsoever

*Sorry for today’s delay everyone, still working through a nasty bout of Covid. Next week should be back on schedule!

SPY

I think we’ve got to be pretty damn happy with this setup in the SPY, no? It took a day or two to develop, but once the sellers took over, the $451s came into play, with prior resistance near $451.50 holding as support, along with the 10-ema on the 4-hour chart (the blue-dashed line) and 78.6% retrace.

Here’s the before chart (from yesterday’s OP):

Now here’s the after:

So what about today?

The $454.50 to $455 area looks key to my eye. It’s where prior support was before the SPY broke down and traded lower. If it’s reclaimed, the highs near $456.50 (and then some) could be back in play.

On the downside, yesterday’s lows are an important pivot. A break below and failure to regain it puts the 10-day ema in play currently near $449.

• Upside Levels: $454.50 to $455, 456.50, $459

• Downside Levels: $451.50 to $451.75, ~$449 + 10-day ema

S&P 500 — ES Futures

Nice 1-hour chart below shows the overnight rally we’re seeing for anyone who bought that late-day dip yesterday.

The ES is ramming back into the 50% retrace of the dip, along with a prior support zone. If it can clear this area, it opens the door back up to the 4590s. Above yesterday’s high can put 4600+ in play.

On a dip, short-term buyers want to see ~4575-ish hold as support.

• Upside Levels: 4582, 4590-94, 4600, 4610

• Downside levels: 4575, 4555-57, 4545, 4530-33

SPX

• Pivot: 4450-53

• Upside Levels: 4560, 4567.50, 4578-80, 4600

• Downside Levels: 4527.50, 4500-05

V

Weakness in AXP and DFS may not be foreshadowing a great situation for V, but keep an eye on the retest of the $234-36 area and the rising 21-day moving average.

That’s a retest of the Q1 and Q2 highs and a key moving average.

ARKK

Very similar setup here, we maybe should have taken a little more off the table on that rally, but ultimately, I am looking for a retest of the Q1 and Q2 highs near $45.50, along with the 21-day sma.

If it fails, we’ll know in a hurry. Can use a tight stop in that case and can always re-engage if knocked out. Size accordingly.

Open Positions

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

1. DOCN — Long from $38.25 — Small trim at $39.75 to $40 and a second trim above $40.75. Trimmed more between $45 and $47 and down to ⅓ at $49.50+

   1. Should have us down to a ⅓ position. I think we may be able to get $53+ out of this.

2. JPM — Retested the breakout zone and long. This is a longer term swing. Many are long from $143-145. Still carrying ¾ to ⅔ of position against a break-even stop-loss.

   1. Down to ½ if we see $157 to $157.50+ (or anything above Thursday’s high if playing more conservative)

3. ARKK — Long from ~$46 — trimmed near/at $50. Still carrying ⅔ to ¾ of position. Trim at ~$52

4. HSY — Longer-term swing. Want to see this one hold $235-36, but willing to be patient.

   1. Minor trim $247.50, if preferred.

5. DAL — long from $47.20 (daily-up) and trimmed at $48. Trimmed down to ½ at ~$48.50. $49 is technically the next trim spot, but aggressive bulls can just go for the post-earnings highs near $49.80.

   1. Break-even stop

6. **SBUX — Either long from ~$101.42 or waiting for $102.50+ (the monthly-up rotation). If long currently, $99 to $99.50 looks like a low-risk way to proceed and $103 seems like a reasonable ¼ trim for those already long.

7. DIA — long from ~$346.75. ¼ trim near $350, down to ⅓ at $351.50. Notice the rejection from the 78.6% retrace (of the bear market range).

   1. B/E stop from here. I’m okay with getting down to a 40% to 50% position if we see $354-55+ today

   2. YM — long from ~34,900 and ⅓ trim at 35,225 (+325). Second trim at 35,417+ (+517) and finally, small trim at 35,500 (+600)

   3. Can trim down to ¼ to ⅓ position if we see 35,500+

      1. While I do think the YM can keep going, it’s on a 9-day win streak, so better to be prudent and take the gains, then look to re-establish a long, IMO.

8. WMT — went weekly-up from this week’s play — Trim above $157 and ideally, above yesterday’s HOD. $158 is the next trim level, to get down to maybe a 60% position. Ultimately I want to see $160+ on this.

Go-To Watchlist

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

Relative strength leaders →

(Lack of updates here but these names remain my top focus list!)

1. Growth stocks ARKK — DKNG, DOCN, UPST, SHOP

2. LLY, CAH

3. AI stocks — NVDA, AMD, AVGO, ADBE, SMCI

4. Mega cap tech — MSFT, AAPL, META, CRM

5. Select retail — CMG, ELF, LULU, COST

6. Homebuilders ITB — TOL, KBH, DHI

7. BRK.B

8. ABEV, DXCM

9. Cruise stocks — RCL, CCL, NCLH

10. DAL, DT, AMAT

Relative weakness leaders →

1. DIS → new 52-week lows

2. CF, MOS

3. PFE (all vaccine gains now gone)

4. EL, FL, DG

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!