Wen New Highs?

Why I'm Not Sleeping on MAGS

While July has proved frustrating for momentum traders, a quiet development is taking place beneath the surface that, if my feed is anything to go by, appears to be passing most people by.

But before we get to that, consider this quantitative study from Bluekurtic.

What it shows is remarkably simple. In 16 of the previous 17 years in which the S&P 500 made a new high during June, the index went on to make another new high in July.

As things stand, preserving that impressive record simply requires the S&P 500 to rally a little over 1.8% during the nine trading days remaining this month.

So rather than asking whether we’ll make another new high, I’m more interested in what might get us there.

The MVPs are Stepping Up

For those of you that caught my latest newsletter, it won't come as any surprise to see the likes of MTUM and DRAM taking a breather this month. In fact, throughout July, both Q2 leaders have corrected by 12.5% and 29% respectively. So far, so predictable.

But while much of the market remains fixated on mourning the loss of its biggest winners, others have been keeping a weather eye on the stocks most likely - at least from a purely mathematical perspective - to drag the S&P 500 over the line and into fresh all-time highs.

I am, of course, referring to MAGS - the ETF tracking the Magnificent Seven. Because for all the talk of broadening participation, when it comes to dragging the index higher, these seven still do an awful lot of the heavy lifting.

Right now we’re seeing MAGS trending higher above key moving averages, having offered savvy buyers a solid entry point between the 61.8 and 78.6 retracement.

Not All MAGS Are Equal

Of course, recognizing that the Magnificent Seven are likely to do the heavy lifting isn't the same as concluding they're all buys. Far from it.

AAPL, for example, has already enjoyed an exceptional run and is beginning to look stretched from a risk/reward perspective. MSFT, meanwhile, remains below its 200-day moving average - a hurdle I’d rather see reclaimed before committing fresh capital.

That leaves a much shorter list.

AMZN, TSLA and NVDA all strike me as names quietly coiling beneath the surface. None have yet made the sort of euphoric move seen elsewhere, but all are displaying the kind of constructive price action that could see them assume leadership should the S&P 500 make one final push to fresh highs this month.

In other words, if the Magnificent Seven are going to provide the fuel, I’d rather own the names with room to run than those that have already emptied the tank.

NVDA

Of these names, NVDA has me the most interested. Trading above an upwardly mobile 200dema, check. Higher low above a key retracement level. Check. Moving averages coiling for a big move. Check, check and check.

AMZN

AMZN, similar story - trading above key MAs having offered a nice entry when price reclaimed the 200dema back late June.

TSLA

TSLA is worth a look here too. Spicy, for sure. But that potential higher low in the golden pocket makes this one worth considering - with the obvious trigger being a sharp and swift move back above the coiled moving average ensemble.

So What’s The Trade?

Given the combined 40% weighting of AMZN and TSLA within XLY, my attention is increasingly turning towards September $120 calls.

The extra time gives the trade room to develop, while the risk management is straightforward: as long as price holds above the 200-day moving average, I'm happy to stay involved. A decisive break below it, and I'm out.

I’m also eyeing a swing position into NVDA earnings in late August.

For this trade I’ll likely go further out of the money to keep the premium manageable, while bringing the expiration in slightly compared to the XLY calls.

The hope is that a strong pre-earnings run quickly pushes the options into the money, allowing the move in the underlying stock to do the heavy lifting rather than simply relying on more time.

Have a great week.

Alex

Disclaimer: None of the information contained in this newsletter constitutes financial or investment advice, nor should it be interpreted as a recommendation to buy, sell or hold any security or financial instrument. Everything shared here reflects my own research, opinions and trading process at the time of writing, and is intended for educational and informational purposes only. Markets are inherently risky, and past performance is no guarantee of future results. If you choose to act on anything discussed, you do so entirely at your own risk. Always carry out your own research, consider your personal financial circumstances, and, where appropriate, seek advice from a qualified financial adviser. Options trading carries significant risk and can result in the loss of your entire premium.