After chasing Amazon (AMZN) for a year, the bears have finally caught up — and they’re not hesitating to press their advantage.
Since its breakout attempt failed miserably just shy of $700, Amazon stock is down 25%. A quarter of its value gone, just like that.
Support levels have given way left and right, leading to severe technical deterioration. The latest victim, and perhaps one of the most important, is the 200-day moving average.
At $528, AMZN stock is currently beneath this oft-watched indicator sending tremors across the land. Charting junkies will be watching closely to see if today’s submersion turns into a brief undercut or a full-fledged breakdown.
One thing is undeniable — bad things happen when stocks reside beneath their 200-day moving average.
Not surprisingly the relative strength in Amazon stock has also broken its uptrend. For the first time in over a year, AMZN stock is underperforming the S&P 500.
Going down with the overall market wouldn’t be so bad. It’s the fact that it’s dropping faster than everything else that Amazon fans should find so disconcerting. If today’s 200-day moving average breach sticks, watch for a retest of $500 in the coming month. That’s the next logical support level.
While I don’t doubt this will turn into a buying opportunity for longer-term investors, those looking to accumulate Amazon shares should wait for bottoming signs first. For everyone else looking to score on additional downside, consider the following option trade.
Bank on the Bears With Amazon Options
Traders unwilling to shell out thousands of dollars to buy up AMZN put options (they’re quite expensive) might consider buying a put spread instead. We’re still going to buy a put option, but we’ll sell a lower strike put against it to bring in some premium partially offsetting the cost. For example, we could buy the April $530 put while selling the April $500 put for a net debit of $13.60.
The max loss is limited to the initial $13.60 and will be forfeited if the Amazon stock price sits above $530 at expiration. The max reward is limited to the distance between strikes minus the net debit, or $16.40, and will be captured if the Amazon stock price can fall below $500 by expiration.
By using April options we give ourselves two months for AMZN to drop sufficiently.
At the time of this writing, Tyler Craig had no positions in any of the aforementioned securities.
