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Plenty of large-cap technology stocks such as Amazon.com, Inc. (NASDAQ:AMZN) in recent weeks have topped off strong rallies in 2017 with even steeper moves, giving their charts the proverbial parabolic look. Parabolic charts are dangerous in that they often lead to sharp mean-reversion or corrective moves.
Amazon.com is scheduled to report its next batch of earnings this Thursday after the close of trading and looking at implied volatility, or the price of options, plenty of investors are bidding up option prices likely to protect long positions in AMZN stock.
In fact, the implied volatility is currently the highest it has been over the past 12 months at 45%.
To be clear, rising implied volatility into a stock’s earnings report is a regular occurrence, and so you know, IV usually quickly collapses again once the earnings news has come out. What’s risky about AMZN stock at present juncture however is the combination of its parabolic chart in multiple time frames and the spiking IV.
AMZN Stock Charts
Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week
For perspective let’s note that on its multiyear weekly chart, AMZN stock has been going parabolic since early January as it blasted out and above its longer-standing up-trending slope. The RSI momentum oscillator meanwhile has reached notable overbought readings.
If and when this stock takes a pause, then a re-test back to the $1,200 level would be a point of reference for yours truly, which really only gets us back to the early January levels.
Moving averages legend: blue – 8 day, yellow – 21 day
On the daily chart, note that AMZN stock has been trading above its yellow 21-day simple moving average since late October 2017 and that the MACD momentum oscillator (bottom of chart) has reached all-time-record overbought readings.
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Thus the trade setup here is very straightforward: Any further blow-off rally or notable bearish reversal (failed intra-day rally) following Thursday’s earnings report would likely offer active investors and traders an opportune spot to play AMZN stock from the short side. Once implied volatility decreases following the earnings report, traders could look to buy at the money puts or put spreads with two months left to expiration for a first downside target near $1,300.
Check out Anthony Mirhaydari’s Daily Market Outlook for Jan. 30.
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