Shares of Amazon (NASDAQ:AMZN) continue to consolidate even as the markets push to all-time highs. Amazon stock is basically unchanged since the beginning of August as margin pressures and competition fears weigh on the online retailing giant.
Although competition has increased from the likes of Walmart (NYSE:WMT) and others, the fact remains that Amazon is still the first stop for internet shoppers. Time for the sleeping online retail giant to awake once again, especially as the holiday shopping season gets into full swing.
AMZN has been mired between $1,700 and $1,800 since August as the stock consolidated. The stock is, however, beginning to look decidedly better from a technical perspective. Let’s take a look at the Amazon stock chart.
Amazon Stock Chart
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The $1,700 major support area held once again. 14-day RSI has made a series of lower highs and turned sharply higher, which is an encouraging sign for the bulls. MACD continues to have a shallower negativity and is close to generating a fresh new “buy” signal. Momentum has turned higher after failing to make a new recent low and is poised to turn positive. Amazon stock also just broke back above the widely-followed 20-day moving average. This has been a reliable precursor to a pop in the past.
The price action yesterday finally saw a meaningful move in Amazon. AMZN stock moved higher by 1.61% on news that it is launching a store on the Chinese e-commerce company Pinduoduo’s (NASDAQ:PDD) website. This new strategy will allow AMZN to enter the Chinese market once again after it closed the company’s online Chinese stores in July.
Although just a pop-up store to start, the move could be the beginning of a fresh initiative to gain a foothold in the mammoth Chinese market. It also could finally spur AMZN stock to break out of the trading range at long last.
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The Amazon stock price continues to trade at a big discount to the NASDAQ 100 Index. AMZN is usually highly correlated to the index, given that it is the third-largest stock component with a weighting of just under 9%. That correlation has broken down recently. Amazon has been a huge under-performer to the NASDAQ over the past several months. I expect that correlation to revert with AMZN stock being a relative out-performer in the coming weeks.
AMZN Volatility Levels
Volatility, both historical (HV) and implied (IV) are near yearly lows. The current HV percentile is just 2%. This means AMZN stock hasn’t been anywhere near this calm in the past year.
Average True Range (ATR), another gauge of price volatility, is also just off the lowest levels of the year. Current IV percentile is just 5%, which is also at an extremely low reading. All in all, AMZN stock has been overly complacent and is due for a break out.
Trading Amazon Stock
Stock traders should look to buy AMZN stock on any weakness. An inital upside price target would be the September highs at the $1,850 area. A meaningful break of downside support at $1,700 would serve as a viable stop out level.
Option traders may want to take advantage of very low levels of implied volatility (cheap option prices) and position for an upside breakout with a bullish call spread. Buying the December $1,800 / $1,825 call spread for $8.50 is an attractive way to position in a defined risk manner. Maximum risk on the trade is $850 per spread with maximum gain of $1,650 per spread. Potential return on risk is 284% if AMZN closes above $1,825 at December expiration.
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.
