by Tyler Craig | August 21, 2013 10:50 am
Tuesday’s feeble attempt by the bulls to wrest back control was uninspiring to say the least. Although they charged right out of the gate feigning strength, buyers fumbled into the close.
The strongest rebounds commence with an exclamation mark — a potent bullish reversal candle such as a hammer or bullish engulfing on high volume. Yesterday was anything but — in the S&P 500, at least. Interestingly, the small-cap-laden Russell 2000 did stage a robust reversal, so there are at least some positive signs for you undying optimists.
Weak bounce attempt aside, there are some stocks coming into key longer-term support levels. Their reaction at these levels should be quite telling on the seriousness of our current correction.
One such intriguing setup lies in the chart of online retailing behemoth Amazon (AMZN). Since briefly touching a new all-time high last month, Amazon stock has quietly receded to the topside of a previous trading range. This old resistance zone at $283 has a good chance of becoming new support. In fact, if $283 doesn’t hold as support, the powerful breakout from early June will be negated and morph from a once-promising trend-continuation pattern to a now-ominous fakeout (i.e., false breakout) pattern threatening the very existence of AMZN’s intermediate-term uptrend.
While the magnitude of the recent downturn was sufficient to turn the short-term trend lower, shifting to a higher time frame, such as the weekly chart, reveals a quality pullback that is providing a low-risk entry point. If the broader market discontinues its bearish behavior and Amazon stock is able to hold this support level, a bullish play could be worth a shot.
Buy the Oct 285-295 call spread by purchasing the AMZN Oct 285 call and selling the Oct 295 call for around $4.75. The max risk is limited to the initial debit paid, and the max reward is limited to the distance between strikes minus the net debit, or $5.25.
In timing the entry, you might consider waiting until the current weekly candle has fully formed (after Friday of this week) and Amazon stock has broken above the high of the candle.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
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