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AMZN Bearish play?

January 4, 2007

I believe this was one that we saw on our quick search for potential bearish plays.

Here’s what it looks like on the regular one year chart with the Investools study set. Do you know what you might do with this? Does this give you a valid sell signal? Does it give you a valid signal to initiate a bearish position? If you were to play it to the downside, what would your target be? Where would your stop be? What time frame would you expect for your target to be reached? When would you sell if it goes as planned? What if it doesn’t go as planned? These are just a few of the questions a good trading plan with rules would help you answer.

(Click on the chart to see it bigger.)

It’s got three red arrows. Two of them very fresh. But it’s in an uptrend. Or is it?
Depends which time frame you look at.

What if we didn’t want to look at the indicators for red and green arrows. Would we be lost? Or would we be closer to looking at what counts, price action? What if we did without indicators and went on trend and support and resistance alone?

Looks a bit different this way. To my eyes, it speaks more clearly. With some support and resistance lines drawn in there, we have some very clear parameters to work with.

Don’t forget to look at the bigger picture. The 5 year chart with weekly candles will often tell a more powerful story.

The long term(6 months or longer) trend is down with the current price relatively high in the widening channel. The intermediate term (1 to 4-6 months) trend is up. We have a lower high, but not yet a lower low to break the uptrend.
The short term (2 days to 4 weeks) we might call sideways with equal highs and, as of yesterday, equal lows. The intermediate term up-trending support line was broken two days ago and yesterday showed a gap down to confirm the trend-line break without a doubt. But is it ready for buying puts? I guess it depends on your rules. Is a broken support trend-line good enough for you to buy puts? Or do you need a downtrend first?

So here we are with no indicators. If the price breaks support at 38 and makes a lower low we’ll officially be in an intermediate term down trend and once again in sync with the long term down trend.
Let’s say we get in at the end of the day on support break and go short(or buy puts) at 37. Assuming that we are going to get out on a move back above 38, there’s roughly $1 risk.
Looking back at the long term chart, I think you could see 27.50 as a logical target, but just to be conservative, let’s use 30 or even 32.50 with some former support at that level. 32.50 would give you $4.5 reward to that $1 risk. That’s quite good.

If you were bearish on the market and bearish on the Nasdaq, this could be a very attractive trade. It may not pan out. The stock may go back above 38 in two days or two weeks and following our rules for the planned trade, we’d have to get out for a loss. But I bet if you do ten trades that look like this and stick to your plan for the trades, you’ll make some nice money in the end.

This stock has a P/E on current year EPS of 58 in contrast to its group P/E of 33. With estimated growth of 28%, it has a PEG of 2.54. Could be ripe for a fall. One of these days I’ll do a post on P/E and PEG as I understand them.

There’s nothing wrong with the Investools set or using indicators of whichever kind. But if you use them, you must have a plan for using them and then must be consistent and adhere to your plan for them. But never forget the golden rule that “Price is King.” The trend and support and resistance are crucial to be in tune with.

For me, looking a the chart without indicators can be very helpful to see the most important things more clearly. But whether you’re using no indicators, the Investools set, or your own homebrew, draw lines. Support and resistance lines, diagonal and horizontal.
You’ll be amazed at how they come back to help you.

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