Are you listening? Amazon.com, Inc. (NASDAQ:AMZN) is going lower. But the evidence this strategist is conferring differs from what’s being heard on The Street regarding AMZN stock. For traders who also see continued technical weakness in the days and weeks ahead, a bear put spread in lieu of shorting shares of Amazon is an attractive option. Let me explain.
It’s no secret President-elect Donald Trump has had his issues with Silicon Valley and the likes of Amazon. But now AMZN may be in bigger trouble.
Aside from Trump having taken issue with large-cap tech companies and even fingered Amazon’s business practices in recent months as inappropriate, now AMZN stock finds itself, potentially, in a politically charged, Apple Inc. (NASDAQ:AAPL) type situation.
Readers may recall Trump was a vocal critic of Apple’s refusal to help authorities obtain private information from the iPhone of the suspect in the San Bernardino massacre. In fact, he called for a boycott of Apple products.
Regarding Amazon, last week it was learned the e-commerce goliath refused requests from Arkansas police to obtain recorded voice data from Amazon’s hot new Echo communications device as part of a murder investigation.
How this situation ultimately plays itself out in the court of opinion, as well as up on Capitol Hill, is up for debate. But one thing already appears more certain with Amazon, the market has spoken.
If traders are listening, the message is AMZN stock is headed lower.
AMZN Stock Daily Chart
Technically, AMZN stock is giving fresh confirmation its corrective move of around 16% is not finished, as evidenced by the provided daily chart view of Amazon shares.
Since breaking below a couple uptrend lines, Amazon has developed a symmetrical triangle pattern the past two months. The price formation is generally viewed as a neutral formation, until shares break above resistance or below support. Having said that, bears in Amazon now hold the directional edge.
This past Friday, AMZN stock broke below pattern support on increased distribution. The next logical support is the 200-day simple moving average near $735. A failure to hold the key longer-term average would likely result in a challenge of the $695 – $710 price zone.
The zone support area holds the November low, the psychologically important $700 level, a 38% retracement from 2016’s low, as well as the prior all-time-highs. Our technical view is with so many critical levels in play, testing the $695 – $710 area is all but a given at this time.
AMZN Stock Bear Put Spread
Reviewing AMZN’s options, the Feb $730/$715 bear put spread is attractive. Priced for $5.75 with shares of AMZN at $749.90, this vertical requires a decline of less than 5% to maximize its return of 160% or $9.25 of profit at expiration if shares are below $715.
I chose this bear spread as it’s placed a bit above zone support of $695 – $710, which we expect will be tested. Using February also gives the trader some time for the bearish thesis to play out without going overboard.
In the event AMZN stock fails to correct further, I’d personally look to exit the spread with a smaller loss above $775. In our opinion this price level gives shares of Amazon enough technical leeway while respecting Friday’s triangle breakdown. Likewise, if AMZN does proceed to move lower, taking either profits or making a spread adjustment is a prudent course of action.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
