Amazon Is Finally Bouncing Back and Here’s How to Play It

Monday’s tech stock rally was powerful enough to pull Amazon (NASDAQ:AMZN) shares out of their tailspin. Fans of the e-commerce giant cheered the victory. It was desperately needed after the post-earnings plunge pulled AMZN stock 16% off its highs. In today’s article, we’re going to take an updated look at the price chart to see if this week’s strength is worth buying.

Source: Frederic Legrand – COMEO / Shutterstock.com

Let’s start with the key points.

First, the fact that buyers finally returned to Amazon should shock no one. If there’s one thing the market has taught us over the past decade, it’s that weakness in fundamentally sound companies is always fleeting – always. This has been especially true with mega-caps like Amazon and its fellow tech behemoths. As usual, the rebound was a matter of when, not if.

Second, Amazon nosediving on earnings is forgivable. Every earnings season always has its fair share of winners and losers. It is a great separator.

That said, the element of the past month’s bearish drama that I find hardest to forgive is that it transpired while the Nasdaq has been notching numerous new records. Sucking wind when your sector is slumping is one thing. Doing it while money is falling from the sky is really hard to swallow. Relative weakness has made AMZN stock a hard pass.

But things could be a-changin’.

AMZN Stock Charts

Skeptics will say I’m reading too much into the past two trading sessions. Let them squawk. I’m not calling for a mass price resurrection. Rather, I’m pointing out the obvious.

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Momentum has shifted, support has formed. Amazon looks better now than at any point over the past month. Consider the weekly chart, for instance.

Amazon (AMZN) weekly stock chart with support bounce

Source: The thinkorswim® platform from TD Ameritrade

The false breakout over $3,500 was unfortunate, yes. But how much of a beatdown do we need to suffer for the pattern to have played itself out? I think a nearly 20% whack from the high is sufficient. We’ve returned to the middle of the past year’s trading range and are down four weeks straight. With the strength of the past two trading sessions, AMZN is pushing above last week’s high and signals the potential start of a new upswing.

It’s worth noting we’re bouncing at the same location of the last pivot low ($3,200). This maintains the bullish slant of the weekly trend.

The daily time frame is where things turn tricky. While this week’s rally has carried back above the 200-day moving average, the 20-day and 50-day still loom ominously overhead. We also remain in a series of lower pivot highs and lower pivot lows. Cautious traders might wait for a more definitive bottoming pattern to form, such as a double bottom or higher pivot low.

Amazon (AMZN) daily stock chart with support bounce.

Source: The thinkorswim® platform from TD Ameritrade

Given the mixed signals, a smart approach could be to scale into a bullish position. Start now with a smaller size to respect the earlier nature of the reversal process. Then, add size (i.e., more shares or contracts) as the bottoming formation takes shape and we start to break above short-term resistance levels.

A Cheap Options Trade to Bet with Bulls

If you don’t want to fork out the high dollar amounts necessary for AMZN stock shares, you can build a cheap options trade. Of course, the ultimate price depends on your spread width. Since Amazon moves approximately $50 a day, I think it makes the most sense to do at least a $50-wide vertical.

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The Trade: Buy the October $3,350/$3,400 bull call spread for $20.

Your risk is limited to the initial trade cost of $20, and the reward is capped at $30. This gives you the potential to capture a 150% return on investment if AMZN rises to $3,400 by expiration.

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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