Yesterday’s glorious stock gains were stolen while you slept. It’s a nasty trick of bear markets.
Just when you think the worst is over, equities plunge anew. Tech favorites like Amazon stock are poised to gap lower almost 2%.
Today we’re breaking down the recent action in the e-commerce giant and laying out a few ideas on how to trade it during the turmoil.
Amazon Stock Charts
Amazon entered the correction as one of the hottest (and healthiest) stocks on the planet. Despite the drama and damage inflicted, I’m happy to report its long-term trend remains intact.
Minor support zones have given way, but all the major ones are thus far holding. With yesterday’s snap-back, Amazon shares pushed back above the 50-week and 20-week moving averages, though this morning’s gap will once again test buyers’ willingness to defend these potential support areas.
The critical level I’m eyeing is $1,700. It marks a horizontal floor that halted multiple selloffs in 2019 and needs to hold for the overall weekly trend to maintain some semblance of order. If bulls want to impress me, however, they’ll prevent the stock from taking out Monday’s low of $1,761.
The principal reason Amazon stock’s trend has fared so well relative to the bloodbath elsewhere was its starting point. The powerful rally following January’s earnings report carried it so far from support that it had plenty of room to retreat without reversing the uptrend.
The Daily View
From peak-to-trough, Amazon stock fell 19.4%, putting it in line with the decline in the S&P 500 and Nasdaq. That means we haven’t seen any relative strength during the descent. It’s unfortunate and underscores the sole reason why Amazon’s weekly uptrend is still intact is that it was so overbought heading into this.
Last year’s sloppy trading saw the stock spend months ping-ponging between $1,700 and $1,800. That left a potential support band in this area where demand can help absorb panic selling.
So what’s the trade?
With gaps now commonplace, short-term swing trades with stocks are incredibly difficult. I’d rather use options for a low cost, limited risk bet if you’re inclined to play the manic moves.
Bull Trade: Sell the April $1,670/$1,660 bull put spread for around $2.20.
Bear Trade: Sell the April $2,070/$2,080 bear call spread for around $2.
I’ve placed the short strikes outside of major support and resistance, so we’d have to see a substantial change in the trajectory of Amazon’s trend to get knocked out by April.
For long-term investors, nailing the bottom of this move is impossible. I’d suggest dollar-cost averaging into shares to take advantage of price and time diversification. It turns the event of buying into a process of accumulating.
As of this writing, Tyler Craig didn’t hold positions in any of the aforementioned securities. For a free trial to the best trading community on the planet and Tyler’s current home, click here!
