After a stunning 69% straight-up rally off the Feb. 9 low of around $480, shares of Amazon.com, Inc. (NASAQ:AMZN) finally broke the uptrend on Friday. With both the mojo and momo now finally challenged in AMZN, the short-term top appears to be in place.
Click to Enlarge One of the biggest reasons to be bearish on AMZN now is trend analysis. Since making the mid-February lows, it had been in a clear uptrend. That all changed Friday though, with Amazon finally breaching the trendline. This is a strong signal that the rally is over in AMZN stock.
In my previous post from August 9, I touched on the valuation and complacency concerns regarding AMZN stock at these levels. Nothing has changed over the past month, with the stock now trading at slightly lower prices.
While valuation is always a hotly contested topic in Amazon, the law of large numbers always applies to mega-cap stocks.
Click to Enlarge Even if Amazon meets consensus 2018 numbers, you are still looking at $350 billion market cap stock sporting a 43 price-to-earnings multiple. Certainly it is becoming more difficult for AMZN to grow its way into a more realistic multiple with such a massive market cap.
Perhaps most importantly, the momentum has finally waned in AMZN. Amazon was far and away the best-performing stock of the top 10 U.S. stocks, with a gain of 47% over the past year. With the overall market is beginning to show weakness, the winners like Amazon will get sold first.
With momentum showing serious signs of deterioration (and the uptrend broken), I expect the momentum players to begin to exit in droves. Selling will beget selling as Amazon heads lower.
Click to Enlarge With Amazon looking like it will take out the first level of support at the $760 level, a move towards the next big support level of $731.50 appears to be in the offing.
A long put spread is a straightforward and cheap way to play for the pullback.
AMZN Stock Trade Idea
Buy October $740 puts and sell the October $735 puts for a $2 net debit or better.
These are the traditional monthly options that expire October 21. Maximum risk is $200 per spread, with maximum gain of $300 per spread.
Potential return on risk is 150% if AMZN closes below $735 on October expiration.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at tbiggam@deltaderivatives.com.
