Spectators wondering if they should buy Amazon (NASDAQ:AMZN) now have one less excuse. Thursday’s ramp in the major averages boosted shares of the e-commerce giant back above the 50-day moving average for the first time since the correction began in earnest.
To commemorate the occasion, we’re doing a deep dive on its price chart to lay out the bull case. Then we’ll build out a cheap options trade to swing shares long into the upcoming earnings announcement.
The Stricken Elephant in the Room
Before breaking down Amazon’s upside reversal, prudence demands we consider the implications of President Donald Trump contracting Covid-19. Just last night, the leader of the free world confirmed he tested positive for the novel coronavirus alongside the first lady. The futures markets reacted the way you’d expect them too. Sellers swarmed on the uncertainty, and a sea of red is greeting traders this morning as they wake.
Tech stocks are leading to the downside with the Nasdaq sliding 0.5%. For its part, the S&P 500 is also down about 0.5%. Given the potential seriousness of our 74-year-old president contracting a virus with a track recording of bringing the elderly to their knees, I’m surprised we’re not down more. There’s still time for traders to toss their cookies, mind you, but so far, you have to give equities high praise for their resilience.
As for how it impacts Amazon, the stock is down 1%. That means we’re not seeing particular relative strength nor weakness.
All of the constructive price action we’ll outline below shouldn’t spur you to action unless the broad market can shake off this morning’s nastiness. The fact that the news is hitting ahead of the weekend doesn’t help matters much. Traders might lean on the sell button to de-risk portfolios and see how things shake out by Monday.
That Was a Bottom for AMZN Stock
There’s no denying Amazon’s downtrend formed a bottom last month. Whether it was the bottom depends a great deal on how the markets digest the news above. If nothing else, analyzing how Amazon shares bottomed out provides a lesson in what to look for when trying to spot reversals in the future.
I count four critical steps along the way.
First, a higher pivot low formed last Thursday. Previous to that, sellers were in complete control, and the stock was making a series of lower swing highs and lows.
Second, we broke resistance on Monday. It was the first time buyers were able to breach a ceiling since the downtrend began. Their victory guaranteed the formation of a higher pivot high.
Third, Thursday’s close above the 50-day moving average clinched the turnaround. Prices also closed above the 20-day.
Fourth, volume patterns have returned to normal. While Friday’s session might change things a bit, the past two weeks have seen distribution days disappear.
Amazon Butterflies
If you take the bullish turn in the chart as a sign of things to come, then here’s a bullish options trade you can use to capitalize. Because earnings could throw a wrench into the chart, I want to keep the trade cost minimal so you can hold it into the event.
Call Butterfly: Buy the Nov $3,600/$3,700/$3,800 call fly for around $5.
The strategy is positioned to profit if Amazon makes a run toward $3,700 in the days ahead. You can skew the trade more bullish if desired by making it a broken-winged butterfly.
Broken-Wing Butterfly: Buy the Nov $3,600/$3,700/$3,750 call fly for $13.
In either case, consider waiting for Amazon to break above a previous day’s high to show it’s shaken off this morning’s weakness.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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