It has been three weeks since Amazon.com, Inc. (NASDAQ:AMZN) reported less-than-stellar earnings on July 27. After making a new all-time high of $1,083.31 just prior to the earnings release, AMZN stock plunged $130 points, or 12%, before finally finding support at the $953 level.
While it appears an intermediate-term top may be in for Amazon shares, I also think the lows may be in as well. I expect a period of sideways consolidation for AMZN stock over the coming month … bad for shorts and longs alike, but good for us.
Earnings missed expectations by a wide margin, with 40 cents per share in profits well shy of the consensus estimate for $1.41. Yet revenues actually beat modestly, at $38 billion versus expectations of $37.2 billion.
Many analysts, including InvestorPlace contributor Richard Saintvilus, prefer to focus on the strength in Amazon Web Services (AWS) and the aforementioned revenue growth rather than the earnings miss. Several other analysts echoed a similar sentiment, noting that investors buy Amazon for top line (revenue) growth rather than actual earnings.
Amazon stock is priced on faith rather than fundamentals anyways, so I will leave the valuation argument to the analysts. As a trader, I prefer to focus more on the price action and technicals to tell me what the market thinks about a stock.
And right now, recent price action points to a well-defined trading range for AMZN.
The Charts
The chart below clearly shows a rejection of the highs by the market in Amazon, as shares plunged sharply following earnings — especially once the $1,015 level was breached.
Conversely, the chart also definitely displays that AMZN stock held the crucial $953 support level and bounced convincingly. So it certainly appears that Amazon is back in a trading range environment, similar to the two-month period from mid May to mid July.
Being stuck in a sideways market offers scant opportunity to profit using traditional investment methods such as outright stock buys. Options, however, provide the opportunity to make money from nothing using spread strategies. Given both the well-defined upside resistance area and downside support level, an iron condor strategy is the optimal option trade to deploy.
How to Trade AMZN Stock
Sell the Sep $1,020/$1,025 call spread and sell the Sep $945/$940 put spread for a $2 net credit.
Maximum gain on the trade is $200 per condor. Maximum risk is $300 per condor. Return on risk is 67%. The short $1,020 call strike is positioned above the $1,015 resistance level, while the short $945 put strike is structured below the $953 support level.
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 timbiggam@gmail.com.
