Trade of the Day: Amazon.com, Inc. Is Still Overbought AMZN stock offers a counter-trend trade setup

@djmckennon live


Last Friday , following its earnings report, shares of Amazon.com, Inc. (NASDAQ:AMZN) rallied, but in part due to broader stock market weakness closed well off its intraday highs. While this is no sign of any long-term trend changes, it does further signal the stock’s near-to-possibly-intermediate-term overbought conditions.

AMZN Stock: Amazon.com, Inc. Is Still Overbought
Source: Mike Seyfang via Flickr
So you know and as a point of reference, when I last offered my take on AMZN stock last week on Jan. 30, two days before the company reported its latest batch of earnings, I said that regardless of whether the stock rallies or falters following the earnings report, this current juncture serves as a weak reward-to-risk spot to add to fresh long-term positions in the stock. I furthermore wrote that active investors could look to play the stock from the short side for a trade following the earnings report.


Given the stock’s importance and widespread investor interest, I wanted to follow up on this idea now that the earnings report is out of the way.

AMZN Stock Charts

Click to Enlarge

Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week

On the multiyear weekly chart, we see that after an already steep albeit orderly incline in 2016 and 2017, AMZN stock went into parabolic rally mode as the calendar flipped to 2018.

This left the stock just about hopelessly overbought coming into last week’s earnings report, with the weekly MACD momentum oscillator in record overbought territory by a long shot.


Real Opportunity


Click to Enlarge

Moving averages legend: blue – 8 day, yellow – 21 day

On the daily chart, note that despite a close off the intraday highs last Friday, AMZN stock remains trading notably above its yellow 21-day simple moving average. Considering that this stock often mean-reverts back to this moving average every few weeks or so, this current juncture now offers a play for a re-connect.

The 21-day moving average currently resides about 7% below last Friday’s closing price of the stock, which could be a nice first downside target.

Active investors willing to take a chance on a mean-reversion trade lower in this name could either look to short the stock outright sell out of the money call spreads for income or even consider buying some at-the-money put spreads using options with at least two months left to expiration (for risk management purposes). As a side note, implied volatility in the options remains fairly elevated, so this is not the type of trade one should do in big size relative to any given portfolio size.

Check out Serge’s Daily Market Outlook for Feb. 5.

Tell us what you think about this article! Drop us an email at djmckennon@live.com




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