AMZN has rallied back over the past 2.5 weeks, nearly filling in its earnings gap yesterday at $313.18. The stock’s strength has taken place after AMZN tested the $285 support level for the second time in 2014:
The stock has rallied back to near is declining 50 day moving average, which is around $315. In addition, the 200 day moving average is also now declining, and comes into play around $330. That technical situation suggests significant resistance up 7% in AMZN, with significant support down 7%.
As for the fundamentals, the October earnings report was AMZN’s fourth straight report after which the stock fell around 10%. However, AMZN has generally rallied in between reports, so the stock is only down about 25% from its January all-time high of $408.
In a Name That Trade post before the earnings event, we reiterated our negative view on the stock:
We have not been positive on AMZN for several years (I like to call it the best not-for-profit company in the world). We have also stayed away from trading the stock for the most part in that period given its large earnings gaps and big swings.
We are not alone in this view. David Einhorn recently laid out similar thoughts on AMZN, as noted by Tae Kim on Yahoo Finance:
The letter says they added “medium sized” long positions in Consol Energy (CNX) and EMC (EMC).
The most interesting part of the letter is the above paragraph on Amazon (AMZN). Einhorn has said negative things about Amazon in the past, but this letter is the first time he lays out a bear case in such explicit fashion.
Einhorn calls out how the Amazon bull case of low profits due to high growth falls apart as the company reports increasing losses during growth deceleration.
Of course, as is always an issue with trading AMZN, timing the bearish trade is difficult. AMZN has shown resilience on numerous occasions in the past few years even after weak earnings reports. As a result, we’re not going to take any position at the moment. However, it’s worth noting that 30 day implied volatility is now at the low end of the 2 year range heading into the busy holiday sales season:
[caption id="attachment_47989" align="alignnone" width="600"]
AMZN 30 day implied volatility, courtesy of Bloomberg[/caption]
With that in mind, if AMZN continues higher to around the $325-$330 area, we’ll be on the lookout for a possible long premium structure, likely in April, for a move back to the $285-$300 support area over the next few months.