Online retailer Amazon.com, Inc. (NASDAQ:AMZN) is scheduled to report its latest quarterly results on Thursday, Oct. 27, after the bell. Amazon stock is one of a few heavyweight tech stocks that just keeps grinding higher in an otherwise low-growth environment.
Here is my road map for trading AMZN stock following the earnings report.
Amazon stock is up 23.5% for the year-to-date, outperforming most everything else, particularly if we exclude any illiquid markets. In many ways the growth story — or lack thereof, from a global macro perspective — has not changed since late 2014. Low economic growth, slowing corporate earnings and ultra-low interest rates are forcing investors to chase any pockets of growth, hence the interest in Amazon.com.
Another way of looking at this is that investors are taking on ever riskier investments, such as junk bonds, in a search for yield. This doesn’t have to lead to a doomsday scenario, but the overwhelming sense I’m getting by talking to investors is that several have put too many eggs in one basket. Specifically, they’ve invested a disproportionately large part of their portfolios in large-cap tech stocks.
While I’m a believer in stories like that of Amazon stock, looking at the below charts, I can’t help but think that the next 10% move may be to the downside.
Amazon Stock Charts
On the multiyear weekly chart, we see that the majority of the price action since early 2015 has taken place in a well-defined uptrending channel.
What’s concerning, though, is that 2016’s rally has caused a major negative divergence between price and momentum. Traders should note that the MACD momentum oscillator so far this year is developing a lower high, but price has notably pushed to higher highs.
At the same time, AMZN stock is tightly hugging the upper end of the trend (i.e. upper purple-dotted line). From a trend perspective, Amazon might be overdone — and overdue for a mean-reversion back to the middle or lower part of the trading channel.
On the daily chart below, you can see that the September rally pushed Amazon stock above the rising wedge pattern. The stock also continues to hold its yellow 50-day simple moving average as support. While this will be a constructive pattern for the bulls in the near-term, AMZN’s tendency to gap up or down following earnings could quickly make any near-term technical support levels irrelevant, particularly if we consider the bigger-picture chart.
The options market is pricing in about a 5% move in AMZN stock following Thursday’s upcoming earnings announcement. On the upside, this would translate into a move toward the $890-$900 range. On the downside, we’re looking toward about $795, which happens to coincide with the yellow 50-day SMA.
My game plan: Initiate a partial short position should Amazon stock rally toward $900 following its earnings report. This would constitute a break above the longer-standing trading channel from the above chart and thus argue for a mean-reversion lower through a near- to intermediate-term lens.
Alternatively, should AMZN stock drop below the 50-day SMA (around $795) on a daily closing basis, I would also look to short the stock. Use a first downside price target closer to $750.
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