Why Amazon’s Messy Chart Is Still Tradeworthy

Amazon (NASDAQ:AMZN) stock shares have been largely stuck in the mud this year. Capturing the year-to-date profit of 9% has required patience and a willingness to sit through months of chop.

Logistics activity on the Amazon site of Vélizy-Villacoublay in France. Packages are sorted by workers on coneyors.
Source: Frederic Legrand - COMEO / Shutterstock.com

At the same time, mouth-watering gains from other tech giants have overshadowed AMZN stock’s paltry performance. Throw in a messy price chart with crisscrossing moving averages, and it makes you wonder why one would even bother with trading the stock right now.

I have two answers to this particular line of questioning.

First, the short-term trend has improved since last month’s earnings announcement, so there are reasons for optimism.

Second, even if you don’t have a strong directional opinion, the options market provides many ways to profit if AMZN stock treads water. So, if you think the king of e-commerce can maintain its stability heading into year-end, then there is money to be made.

Let’s take a closer look at the price chart to map out the trends and price levels that matter to today’s trade idea.

AMZN Stock Chart

Amazon (AMZN) weekly stock chart with trading range.
Source: The thinkorswim® platform from TD Ameritrade

The five-year weekly chart shows just how impressive Amazon’s ascent has been. It entered 2017 south of $750, and it’s now above $3,500. That’s a gain of nearly 400%, so let’s start with the obvious point that if any stock deserves a year of consolidation, it’s AMZN.

Remember, sustainable trends alternate between periods of expansion and compression. These pausing periods allow earnings to catch up and valuations to ease. Importantly, this year’s range has a bullish tilt. Note how the 50-week moving average has provided support along the way.

In addition, with the last four weeks of rallying, AMZN is now above the 20-week moving average as well.

As long as we remain above the weekly support zone at $3,200, the path of least resistance is higher.

On the daily chart, the short-term trend has turned higher over the past month. It’s particularly impressive how well the price bounced back after gapping lower on earnings. The quick response from dip buyers contrasts with how long it took to find a bottom after July’s report. Volume patterns are supporting the reversal as well, with accumulation days multiplying. These high-volume rallies confirm institutions are wading in and bodes well for the new uptrend’s prospects.

Amazon (AMZN) daily chart with short-term uptrend.
Source: The thinkorswim® platform from TD Ameritrade

$3,600 is the next resistance zone to watch. If we can break above it, a return to the all-time high of $3,773 appears likely.

Options Trades

You have two paths to play here. First, if the recent recovery has you itching for a bullish directional play into year-end, then buy call spreads. The following structure offers a relatively cheap bet that can also more than double your money if Amazon returns to its record high by 2022.

Bull Call Spread: Buy the January $3,700/$3,750 call vertical spread for $15.

The max loss is $15 and will be lost if AMZN sits below $3,700 at expiration. The max gain is $35 and will be captured if prices sit above $3,750.

The second route offers a much higher probability of profit, but the payout is smaller.

Bull Put Spread: Sell the December $3,240/$3,230 bull put for $1.

Consider this a bet that AMZN stock will hold above $3,240 for the next 30 days. If it does, you’ll capture the $1 per spread. The max loss (and trade cost) is $9. To minimize the damage if you’re wrong, consider exiting on a break below the short put strike price at $3,240. That should reduce the loss to around $3.50.

On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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