Amazon.com, Inc. (AMZN) reported earnings on April 28 that beat on both the top and bottom line, with EPS of $1.07 versus consensus of 58 cents and revenues of $29.13 billion compared to $27.98 billion expected.
The stock gapped up sharply following the earnings release, along with news that it will take on Alphabet Inc‘s (GOOG, GOOGL) YouTube and a $1,000 price target by analysts at Bernstein , ultimately breaking out to new highs of $713.23 yesterday. If history is any guide, however, I think Amazon stock will retest the $700 level over the coming weeks.
AMZN Stock Charts
As the chart shows, AMZN cleared the old highs of $693.97 from Dec. 29 of last year. It is also getting overbought from a 9-day RSI standpoint, with a reading approaching 75. The last time it was this overbought was following 2015 Q3 earnings.
A closer look at the price patterns following that earnings report shows a very similar chart pattern.
After the 2015 Q3 earnings, AMZN gapped higher and rallied sharply, before finally pulling back and consolidating. Amazon stock is following a similar pattern now and I look for this similarity to continue, with AMZN moving back towards the $700 level. Implied volatility (IV) has also caved to congruent lows, a reliable bearish contrarian indicator.
Valuations surrounding Amazon are always a hot topic for debate, and certainly AMZN is priced with some pretty extreme growth assumptions. With a market cap now approaching $350 billion, the law of large numbers begins to apply.
With the shorts likely having been forced to cover, any sign of weakness in AMZN stock may lead to some quick profit taking by the longs. This could drive the price down towards the $700 level over the next few weeks.
In a previous post on Amazon, I noted that short-term, AMZN shares were due for a pullback, which proved to be prescient. I am looking to position in the same way now, using a short term put calendar trade.
Specifically, I am buying the May 27 $700 puts and selling the May 20 $700 puts for a $4.10 net debit.
The maximum I can lose on the trade is $410 per contract. Ideally Amazon stock closes near $700 on May 20 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 firstname.lastname@example.org.