Warning: This Stock May Correct

In speaking to institutional trading desks on Monday, it was clear that out of the flurry of large-cap technology stock earnings, investors are most anxiously looking toward the earnings report from Amazon.com, Inc.(NASDAQ:AMZN) stock this Thursday after the close of trading for the day.

AMZN stock is up nearly 40% year to date, and from a news headline perspective, the company is seemingly taking over the entire world of retailing, which is to say that the bulls at this juncture are very loud and possibly heading into “reckless” territory.

Before looking at the charts, to be clear and in full disclosure, I am a staunch bull on Amazon.com’s business model as well as its stock through a longer-term lens.

In other words, any near-to-intermediate-term post-earnings-report trade setup should be viewed in a vacuum.

Also, while I realize that AMZN stock by definition is not a technology stock, from an investment theme perspective year to date it has been and continues to be treated as such, much like the rest of the largest stocks in the Nasdaq 100 as represented by the PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ).

Yesterday I offered that shares of Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) are in stretched bullish territory through the near- and intermediate-term lens and that any further rally or a bearish reversal following the earnings report would set up for bearish trades. I see the same basic theme playing out for AMZN stock.

AMZN Stock Charts

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

On the multiyear weekly chart, we see that the year-to-date rally in AMZN stock is nothing new but rather is simply a continuation of a strong up-trending channel as marked by the two purple-dotted parallels, the upper end of which is now once again being reached.

While the lower end of the channel is well supported also by the yellow 50-week simple moving average, the stock at its current juncture is also once again trading notably above its 100-week and 200-week moving averages.

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

On the daily chart, we can draw a similar trading channel for the year to date and note that AMZN stock is also trading near the very upper end of this channel.

Also note that while the stock staged a fresh rally to new all-time highs off the lower end of this channel over the past few weeks, price momentum as represented by the MACD oscillator at the bottom of the chart thus far has only made a lower high. We call this type of discrepancy a “negative divergence,” which at the margin is a leading indicator for price to begin to stall, or even correct.

So, what’s my trade idea for AMZN stock following this week’s earnings report?

Considering where the stock currently trades on the charts displayed in this article, I am particularly interested in fading, i.e shorting, the stock should we see a pop (rally) after earnings into the $1,050 – $1,100 zone or higher. This would then set up an opportunity to either short the stock toward a downside target in the high $900s or for option traders to sell out-of-the-money call spreads.

Should AMZN stock drop following the earnings report, it could also set up a shorting opportunity, which in my eye would need to be traded with smaller size.

— Serge Berger

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Source: Investor Place