Shares of Amazon (NASDAQ:AMZN) have certainly felt the wrath of the markets over the past few weeks. AMZN stock is now down 12% since closing near the $2,000 level on July 24 — the day before its latest earnings report.
Amazon stock fell for eight consecutive sessions recently, and is back near June lows. While earnings certainly were somewhat disappointing, the selling in Amazon stock is getting overdone. Time to be a buyer.
AMZN Stock By the Numbers
Earnings were a miss on EPS but a beat on revenues. AWS came in below expectations but is still grew at 37% year-over-year. I look for that trend to continue.
Several analysts came out in defense of the stock recently. Mike Binger of Gradient Investments thinks investors should use any weakness to be a buyer of AMZN stock, citing relative immunity to any tariff turmoil. MKM Partners reiterated a “buy” rating with a $2,350 price target, up from the previous target of $2240.
And frankly, I agree. The selling has gotten too heavy in Amazon. It is incredibly oversold on a technical basis — the 9-day RSI was below 20 and at the lowest levels of the past six months. MACD printed under -20 and is also at an extreme. Implied volatility has spiked to recent highs.
Overall, Amazon stock is trading at by far its biggest discount to the 20-day moving average over the past half year. The last time AMZN stock approached such oversold metrics, back in early summer, proved to mark a significant intermediate-term low in the shares.
More importantly, after those eight consecutive down days, AMZN stock finally had a reversal day yesterday. Amazon briefly traded lower on the day, only to sharply reverse course. It closed significantly higher than that low — but still lower than its open. This type of price action is many times emblematic of a low in the stock, especially after such a brutal drop. The sellers have finally become exhausted and the buyers are hinting at taking back control.
The spike in implied volatility (IV) signals high levels of panic — and high levels of option prices. It is also a contrarian buy signal and sets up ideally for a covered call trade or option bull put spread to capture this rich premium.
Bottom Line on Amazon
Earnings weren’t great, but the stock got punished too hard for it. AWS is still surging and it’s still the name to beat in online retail. Even recent news that Fedex (NYSE:FDX) would end their partnership seems to have hurt FedEx more than Amazon.
Investors and stock traders should consider buying AMZN stock near current levels and selling the Sep $1,900 call. The premium received for the call will cushion the downside while positioning to be a seller at $1,900.
Option traders may look to sell the Sep $1,725 puts and buy the Sep $1,720 puts for a $1.75 net credit. Return on risk is 53%.
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.