Shares of online retailing giant Amazon (NASDAQ:AMZN) haven’t been immune to the recent stock market volatility. In fact, AMZN stock fell about 14% in recent weeks. However, in the immediate term, the stock looks increasingly oversold and it’s a bounce candidate that active traders should consider closely.
Before we dive into what makes an Amazon stock trade so appealing today, allow me to once again state the importance of understanding the high correlation embedded within the equity market. Unlike commodities or currencies, stocks as an asset class are very highly correlated. This positive correlation gets even more pronounced when volatility increases, as it has over the past week or so.
In times such as these I prefer to stay with indices or broader exchange-traded funds or index futures as opposed to trying to be a hero by outsmarting the market with a single-name stock. However, there are a few exceptions to my approach. This is particularly true when it comes to mega-cap stocks that, for the lack of better term, are the market.
And you guessed it — AMZN fits that bill perfectly.
Also consider that I think the broader stock market and most risk assets will likely go lower in the coming weeks and months, which makes today’s trade idea in AMZN a “counter-trend trade.”
AMZN Stock Charts
For perspective, let’s look at Amazon stock’s multi-year weekly chart. Here we see that for the most part, AMZN has respected a well-defined trading range over the years. From a momentum perspective we can see that despite the sharp 2019 rally, the stock’s momentum — as represented by the MACD momentum oscillator at the bottom of the screen — remains far from its 2018 highs.
As such, for the time being, I see AMZN stock as having more downside in coming weeks or months within the aforementioned range.
In the near to immediate term, however, this week AMZN reached a technical confluence area where a bounce trade is setting up for the quicker traders out there.
Over the past few weeks the Amazon stock price slipped 14% off its highs and earlier this week it arrived at its simple red 200-day moving average. This price zone around the $1,750 area also coincides with plenty of horizontal support (former resistance). Lastly, the multi-week selling spree has momentum oversold in the short term, all of which could set AMZN up for a near-term bounce.
Active traders and investors could look to buy AMZN stock around the $1,750 – $1,800 area with their next upside target at $1,850, possibly followed by $1,870. These profit targets would also mean the stock is filling some unfilled down-gaps from the past week or so. Alternatively, traders could buy the Oct 1,800 – 1,850 bull call spread.
As usual, the best thing about this trade is its well defined risk, which in this case is the aforementioned support area. Thus, any drop below $1,730 would be a stop loss.
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