How to Trade the Breakout in Amazon Stock

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The epic rise in Amazon (NASDAQ:AMZN) has finally met its match. It is a force hiding in plain sight, and until victory is achieved, bullish AMZN stock ideas are best left on the sidelines. At best, you’ll be stuck in a dead-money position. At worst, you’ll lose your hard-earned capital.

Amazon (AMZN) logistics center in Szczecin, Poland.

Source: Mike Mareen / Shutterstock.com

Of course, the amount of damage depends on your selected strategy, but why not avoid the potentially loss-ridden situation altogether by waiting until the contest’s conclusion?

Amazon has ridden the global pandemic wave to great heights. The twin themes of social distancing and staying at home have played right into the hands of the e-commerce king. AMZN stock doubled off its March lows, which is no small feat for a $1,600 stock. Along the way, multiple ceilings arose to halt the ascent. However, each proved temporary, ultimately succumbing to the steady drumbeat of buyers marching to the moon.

But as with all stories, our hero just found a new nemesis.

Amazon first encountered its boss-level foe in early July, and the stock has been unable to defeat it ever since. I’m talking about the resistance zone of $3,250. The inability to push past this area isn’t for lack of trying. We’ve seen no less than five separate breakout bids. Each looked promising. One even had the backing of a stellar earnings report. Despite the extra power, the attempt still failed.

Resistance has become a graveyard in the sky, where rallies go to die.

AMZN Stock Charts

Amazon (AMZN) stock chart showing major resistance

Source: The thinkorswim® platform from TD Ameritrade

Despite the multiple failures, the overall price trend remains constructive. Instead of abandoning their posts, bulls have diligently bought each dip. Resistance has created multiple retracements, but each sortie has stopped short of turning the entire trend. We can look at the moving averages for further clues. Despite the past six weeks of chop, the 50-day moving average has continued rising. That means the intermediate trend remains healthy and supportive of higher prices. Ditto for the 200-day moving average. It will take more than a few weeks of meandering to threaten the trajectory of the long-term trend.

The impact has been most felt by the short-term trend which has started to turn neutral. The flattening of the 20-day is a byproduct of Amazon’s nasty battle with $3,250. But what I find most promising is that we’re still above the 20-day. Its significance as a minor support zone was reinforced on Monday when bulls emerged to buy the dip.

If the past is prologue, then Amazon’s eventual victory is inevitable. Let’s talk about my preferred options strategy for capitalizing on when AMZN breaks above $3,250.

The Low-Cost Trade for a High-Dollar Stock

Until Amazon follows in the footsteps of Apple (NASDAQ:AAPL) and declares a stock split, its richly priced shares will remain a non-starter for some traders. If you’re among them, I have two suggestions. First, there is no harm in buying a single share (or two) of AMZN if you want to keep the cost down. The stock’s average true range is $87, resulting in plenty of profit potential even if you only own one share. Second, venture into the options market. It is chock-full of cheap trades that allow for low-cost bets on quadruple-digit stock prices.

Vertical spreads offer ultimate customization when constructing a trade. For a breakout play, I prefer using bull call spreads. You can widen or narrow the spread width, depending on your desired cost. Here are two to consider.

Trade One: Buy the Nov $3500/$3550 bull call spread. It’s currently priced near $13 but will be more expensive if you wait for the breakout.

Trade Two: Buy the Nov $3300/$3400 bull call. It’s trading for $35 but will cost more after the breakout.

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Article printed from InvestorPlace Media, https://investorplace.com/2020/08/heres-how-to-trade-the-breakout-in-amazon-amzn-stock/.

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