Shares of Amazon (NASDAQ:AMZN) stock have been sold off sharply as the tariff tantrums and trade war tirades took their toll. Amazon stock is now trading lower following an earnings report that beat on both the top and bottom line. So while the market may be gyrating wildly, volatility begets opportunity. Time to take a guardedly bullish stance in Amazon stock.
Berkshire Hathaway (NYSE:BRK.B) recently disclosed it had bought shares of Amazon. Although not personally purchased by Warren Buffett, he called himself an idiot for not buying. Valuations remain difficult at best for Amazon stock, although such traditional metrics as P/E and P/S have tempered dramatically over the past several years. The fundamentals must be okay given that famed value investors at Berkshire just took a stake. Who am I to disagree with the Buffett Brigade?
While fundamentals are the driver for long-term investing, technical analysis is much more important in the shorter term. This is especially true since the advent of algorithmic trading. AMZN stock is looking decidedly more attractive at current levels from a technical take.
Click to Enlarge Amazon has major horizontal support at the $1780 level on the charts. The 9-day RSI reached an oversold reading near 30 before strengthening. The previous times Amazon stock was this oversold marked significant short term lows in the stock. MACD is also approaching extremes that coincided with a subsequent rally in the shares.
Bollinger Percent B, which uses a standard deviation methodology to define a trading range, briefly flashed negative before reversing. The prior three times this occurred over the previous 12 months proved to be very opportune times to take a bullish stance in Amazon stock. Shares are also at a big discount to the 20 day moving average which has signaled a potential pop in the past.
Yesterday also saw a nice reversal in AMZN. Shares sold off after the open and made a new recent low, only to reverse course and rally to close higher on the day. This type of price action is may times emblematic of a low in the stock as the sellers may finally be exhausted
Implied volatility (IV) is at comparatively high levels due to the recent turmoil. Let’s take advantage and position to be a buyer on a further drop with a bull put spread.
AMZN Stock Trade Idea
Sell to open AMZN June $1,700 puts and buy to open AMZN June $1,695 puts for a 70-cent net credit.
Maximum gain on the trade is $70 per spread with maximum risk of $430. Return on risk is 16%. The short $1,700 strike price provides a 6.5% downside cushion to the current stock price.
Tim Biggam may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his strategies can go to https://marketfy.com/item/options-and-volatility.