Amazon.com, Inc. (NASDAQ:AMZN) on Thursday evening reported its latest financial results — and judging by the initial reaction in AMZN stock, investors are mighty impressed.
Active investors should use this opportunity to either sell out-of-the-money call spreads on AMZN stock or sell Amazon short outright for a mean-reversion move back lower.
Amazon earnings for the third quarter came to 17 cents per share, which not only compares favorably to the loss it showed in the same quarter a year ago, but easily trumped analysts’ expectations for a 13-cent loss.
Arguably more important still for this growth company was that revenue jumped more than 23%, in part boosted by one-day sales.
On Oct. 8, I discussed the medium-term overbought readings in AMZN stock and said that upon any further sharp rally, “active investors would be wise to sell, short or sell out-of-the-money calls or call spreads once this happens.” With the initial sharp post-earnings pop from Thursday evening, this trade looks to have triggered.
To be clear, I remain bullish on Amazon stock in the longer-term, but a good amount of the bid in AMZN shares in recent months was due to fund managers having to chase higher the few believable single-stock growth stories, which likely bloated shares.
That’s a dangerous place for bulls to get more bullish.
AMZN Stock Charts
From the multiyear view, not much has changed. AMZN stock remains severely overbought through a multimonth lens if we consider the duration and steep slope of the year-to-date rally.
On the below chart, the upper arrow shows where the stock popped in Thursday’s after-hours trading, which just took the stock to an even more vertical slope. For the most part, the consolidation periods this year in AMZN stock took place in time (sideways, not lower). This just reflects the giddiness in which Amazon continues to be bought.
Ultimately, however, a correction will be necessary, and active investors should find this vertical post-earnings leap to be an opportune time to lean against the stock.
On the daily chart, we see that as of Thursday’s regular-trading-session close, AMZN stock had rallied about 30% since late August and about 15% since late September to retest the July highs that stemmed from the second-quarter earnings pop.
If Amazon opens Friday up near $630-$635 (which is what it looks like it will), then that would measure a roughly 30% move off the late-September lows, and likely will exhaust AMZN stock in the near-term.
Active investors could thus use Friday morning’s open to either take profits on any AMZN stock holdings, sell out-of-the-money calls or call spreads or even sell shares short.
A first downside mean-reversion target then would become the $580 area.
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Successful trading and investing starts with a plan. Download Serge’s essential trading plan, The Essence of Swing Trading e-book. As of this writing, he did not hold a position in any of the aforementioned securities.
