Increasingly and if Covid-19 has taught us anything, it’s hard to live without Amazon (NASDAQ:AMZN). But as an investment right now, off and on the price chart, AMZN stock looks better-suited for investors to place a risk-adjusted, deep discount delivery of shares. Let me explain.
Monday was a nice start to the workweek for the leading Nasdaq Composite. Following last week’s corrective 4% hit and total decline of 11% in just six trading sessions, bargain-hunting assisted by raised Covid-19 vaccine hopes took the market index up 1.83%.
Gains in the tech-heavy bellwether were led by strong and influential rallies in Apple (NASDAQ:AAPL), which tacked on 3%, and Tesla (NASDAQ:TSLA), which soared higher 12.58% by the session’s close. But multifaceted, stay-at-home stock Amazon was conspicuously left out of the rally as shares finished off 0.43%.
Not that AMZN stock was totally alone. Trillion-dollar plus peer Alphabet (NASDAQ:GOOGL) saw similar pressure. And Microsoft (NASDAQ:MSFT) only managed a subpar gain of 0.63%. Still, rather than misery simply loving company, what was behind the weakness in Amazon shares? Seasonality? A harder-to-defend valuation, or lingering fears of elevated U.S.-China trade war risks? Any may have played a part in Amazon’s refusal to rally, but there was news too.
A report that Deutsche Telekom (OTCMKTS:DTEGY) is partnering with France’s OVHcloud to take on Amazon’s AWS and Microsoft’s Azure cloud computing platforms may have had investors’ attention Monday. At the same time, investors seemingly ignored upbeat news Amazon is set to hire 100,000 additional warehouse and operations employees this year. Was this a case of picking and choosing contrasting catalysts? Or were both headlines ignored altogether? At the end of the day, we’ll never know with any certainty.
One thing we do know is that stocks break ranks with the broader market all the time. Sometimes it’s bearish. What’s more, this kind of price action includes even the best stay-at-home and most dearly held stocks like Amazon. Sometimes that divergence can lead to larger corrective cycles that might trim up to 30% from the valuation of companies of AMZN stock’s caliber. In a bearish market environment those losses can easily be magnified, too. Today Amazon stock’s correction stands at 13% compared to the Nasdaq’s 11%. So, what’s the next move for investors?
AMZN Stock Weekly Price Chart
Source: Charts by TradingView
A larger correction that may just be underway has additional backing from the weekly AMZN stock chart. Following a critical weekly doji decision candle that hit all-time highs and briefly broke a steep uptrend line, shares confirmed lower prices with a bearish shooting star pattern this past week.
Near-term, with stochastics just entering oversold territory and showing no indications of the stock bottoming, a much deeper correction and even a bear market into Fibonacci support zone is gaining credibility. Were that to happen and based on Amazon’s March low to September high, shares could test an area from roughly $2,400 – $2,800 before a meaningful intermediate-term rally emerges.
For now, the advice is to stay on the sidelines rather than purchase Amazon stock. In a month or two, the possibility for higher prices is there. Right now though, significant downside risk has grown and should be respected until a stronger low in shares forms. That’s not to say investors can’t gain smarter exposure to AMZN stock today using the options market.
In lieu of our outlook, one favored strategy using Amazon’s options is to combine bullish out-of-the-money, intermediate-term call and put verticals. By joining these type of spreads, investors can position today with defined and reduced risk amid the raised chance of a larger correction, while maintaining bullish exposure to the upside. Bottom-line, this is one strategy where investors can truly have their cake and eat it too.
On the date of publication, Chris Tyler did not hold, directly or indirectly, positions in any of the securities mentioned in this article.
Chris Tyler is a former floor-based, derivatives market maker on the American and Pacific exchanges. The information offered is based on his professional experience but strictly intended for educational purposes only. Any use of this information is 100% the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.