|At certain times, several key technical dynamics will all converge near a particular time/price zone, providing traders with a heightened sense of confidence regarding the near-term direction of a stock, index, or futures contract. In the case of Amazon (AMZN), three price cycles are in agreement that a significant cycle low either has been or is close to being completed, with the stock's key long-term moving average also in agreement that a bullish reversal was due. |
The big question now is whether this strong bounce is the start of a significant new rally or merely part of a larger corrective pattern that might eventually retrace a good part of the entire December 2011 to September 2012 rally. Here's a closer look as we seek some answers from AMZN's daily cycles chart (Figure 1).
|FIGURE 1: AMZN, DAILY. While no one knows just how far Amazon will carry on this latest bullish reversal, the risk/reward profile for a near-term, out-of-the-money short put play look very attractive if the stock rises above Friday's high of 238.71.|
|Graphic provided by: Sentient Trader.|
|After making a major multicycle low on December 29, 2011, AMZN regained bullish momentum, risng in a pattern of violent fits and starts by as much as 58% by mid-September 2012. Strong sales of Amazon's Kindle reader helped fuel increasingly bullish earnings and sales projections during the uptrend, but long-term money flow began to noticeably diverge from the stock's rising trend by late July 2012, only six weeks before AMZN made its run to 264.11 per share. |
The selloff over the last six weeks hasn't been overly panic-driven (but still has plenty of bearish momentum), and its closely watched 200-day exponential moving average (EMA) has so far acted as strong support, allowing for a sharp bullish reversal late last week.
Normally, a decline like this usually turns out to be wave A of a large A-B-C corrective pattern against the previous long-term uptrend, so we'll have to wait and see just how far this current short-covering rally goes before attempting to confirm that. Current cycle studies in AMZN suggest that the stock's next 20-day cycle high is expected to peak between November 10-14, 2012, with the minimum price target of 241.41 and a maximum price target of 276.90.
If AMZN peaks out in the lower half red time/price (TP) zone and fails to rise much above the upper horizontal trendline on the chart, a confirmed high of wave B would likely be confirmed. However, if AMZN manages to rise well into the top end of the red TP zone, the A-B-C correction forecast will need to be revised and/or put on hold. There is simply no precise way to call a market's exact turning points, but this latest 20-day cycle study output does provide a valuable frame of technical reference.
|FIGURE 2: PUTS. The November '12 AMZN $215.00 puts are well below a major area of support near 223.00, helping make a near-term sale of these puts an attractive risk/reward proposition.|
|Graphic provided by: TradeStation.|
|AMZN's long-term money flow (based on the 100-day Chaikin money flow (CMF)(100) is still above its zero line, and since it appears that AMZN has indeed completed its 20-day cycle low (green TP zone) a little early, now might be a good time to set up a short-term play in the stock. |
By selling a November '12 $215.00 put option on a rise above 238.71 in AMZN (Figure 2), you'll be taking advantage of the stock's rapid, ever-increasing time decay, its tiny delta and a strong area of support at the stocks 200-day EMA and 20-day cycle low near the 223.00 area. If it is filled at a price of 1.30 or better, simply manage the trade by buying it back if it declines in value by 50% or rises in price by 100%.
If you feel really confident about AMZN's prospect for a rally into the red zone, you might want to hold out for more gains, trying to keep at least 75-80% of the premium you received for it before buying it back. Risk no more than 2% of your account value no matter how bullish you may be on this stock. Remember, trade wisely until we meet here again.
|Title:||Market consultant and writer|
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|Phone # for sales:||904-303-4814|
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