Tuesday was the first day that Amazon.com (NASDAQ:AMZN) has shown signs of life since last week’s earnings disappointment sent shares careening lower. Anyone who follows the fundamentals of AMZN stock could tell you that this correction would ultimately prove a buying opportunity.
As is always the case with companies boasting a strong balance sheet and business model, it’s never a matter of if they’ll rebound, but when.
For two-and-a-half days buyers went on strike, refusing to scoop up shares after the e-commerce king revealed lower-than-expected revenue numbers for the second quarter.
Fortunately, bulls finally returned mid-day Tuesday, encouraged by the S&P 500’s intraday jump that placed it within striking distance of a new record.
The strength from AMZN stock may not spark an immediate recovery, but it does at least show that bottom fishers are starting to cast a line. And that can be enough to score profits with the suggested trade down below.
Before diving into it, let’s first analyze Amazon’s price chart from the top down.
AMZN Stock Chart Remains Messy
Amazon has mixed signals on the weekly chart due to last week’s setback. Let’s start with the bullish side of the ledger.
First, the long-term trend was uninterrupted by last week’s whack. We still have a series of higher pivot highs and lows that remains uninterrupted.
Second, the 200-week, 50-week, and 20-week moving averages remain in uptrends. The last two times we pulled back to the 50-week moving average, buyers pounced. We’re close to testing it again.
Third, two horizontal support zones loom close at $3,200 and $3,000. If we do breach the 50-week, you can bet bulls will staunchly defend both potential floors. Importantly, $3,000 has served as the low of Amazon’s trading range ever since we pushed above it in the middle of 2020.
The one glaring development that bears can cling to is the failed breakout above $3,500. What started as a promising breakout over major resistance has morphed into an ugly bull trap. Trapped buyers suckered in by the breakout could continue to put downward pressure on prices.
I remain convinced, however, that the smarter play here is to position yourself for the eventual rebound. Chasing AMZN stock into the hole after it’s fallen 12% hasn’t exactly born fruit historically.
On the daily time frame, the trend is officially lower. How can you say anything but with a falling 20-day moving average and prices beneath the 50-day? If you step back, you’ll discover we’re essentially in the middle of the $500 trading range that sandwiched Amazon between $3,000 and $3,500 for nearly a year.
It’s difficult to have a strong directional opinion with such a posture. This, more than anything, is why I’d much rather lob a high probability options trade that relies more on time decay than direction to generate profits.
My Two Favorite Trades
Iron condors are worth a shot if you want to wager prices hold to the trading range for the next month. The implied volatility is high enough to allow for a large margin of error.
Iron Condor Trade: Sell the September $3,100/$3,090 bull put and September $3,700/$3,710 bear call for a net credit of $2.45.
You’ll pocket the max gain of $245 per contract if AMZN stock price sits between $3,100 and $3,700 at expiration.
The alternate bet is to bank on bulls making a big comeback and prices filling the gap created by last week’s slide. If you’re that optimistic, then stick with using bull puts.
Bull Put Trade: Sell the September $3,100/$3,090 bull put for $1.45.
You’ll capture the max gain of $145 per contract if Amazon exceeds $3,100 at 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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