Shares of online retailing giant Amazon.com, Inc. (NASDAQ:AMZN) exploded higher late Thursday after the company reported a surprise profit for its latest quarter. Amazon stock is up big year-to-date as momentum-chasing traders are pushing the stock into the stratosphere.
While it’s all about respecting the trend, AMZN now looks to be terribly overbought. At the very least, a consolidation in Amazon’s stock price after its initial post-earnings spike would seem to be in the cards for the coming weeks.
Specifically, Amazon reported earnings of 19 cents per share — a huge surprise considering the analysts were expecting a loss of 14 cents per share. Meanwhile, revenues came in at $23.18 billion versus expectations of $22.39 billion. Few if any analysts actually had AMZN coming in at an actual profit for the second quarter, catching both bulls and bears by surprise. Thus, the logical move was for a squeeze higher.
Amazon Stock Charts
Looking at the slope of AMZN shares through a multiyear lens shows some reason for concern, at least as far as the sustainability of this move is concerned.
After Amazon stock topped out in early 2014, it spent the rest of the year consolidating lower in price — that is, it dropped about 20% from peak to trough before starting the next up-leg in January 2015. AMZN was up 55% heading into Thursday evening’s earnings report, and with the premarket action, Amazon stock is up about 85% for the year.
Today’s initial spike higher will likely push the Relative Strength Indicator at the bottom of the chart into highly overbought readings, all of which make chasing this stock higher at these levels a low-probability strategy, at least in the short term.
On the daily chart, we note that Thursday’s up-gap is the third post-earnings gap higher this year. The January earnings up-gap measured about 12%, as did the April earnings up-gap. The latest post-earnings pop measures about 18% in early readings, which is simply steepening an already steep slope for AMZN stock.
Furthermore, note that while the February and April up-gaps took place after Amazon had consolidated for at least a few weeks, this latest move comes on top of the stock’s 10%-plus rally over the past two weeks.
My bet here is not that Amazon stock cannot continue higher, but that the rate of change is unsustainable. Active investors and traders could thus look to sell short the stock, although the options market will likely offer juicier opportunities in the early going Friday morning.
One possible strategy to apply here would be to sell out-of-the-money call spreads near the open on Friday morning. Depending on where the stock opens and how high the implied volatility of the options will be, great risk/reward trades could set up. One such trade idea is selling the Sep or Oct $620/$640 call spread, whereby investors sell the $620 strike call and buy a protective $640 strike call against it.
This trade will allow investors to make money if Amazon stock mean-reverts lower somewhat in coming weeks, goes sideways or even continues rallying a little.
Like what you see? Sign up for our daily Beat the Bell e-letter and get investment advice delivered to your inbox every morning!
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.