Trading the Disruptive Gap- The Curious Case of Amazon

The volatility around earnings season allowed us to look at some disruptive trading patterns. Aggressive post-earnings sell offs in Meta Platforms (FB) and Netflix (NFLX) provided insight into the psychology of portfolio managers and how moves impacted investment decisions.

Perhaps the most interesting earnings action came from tech giant Amazon (AMZN). A review of trades leading into and following earnings can help us understand the key level for the stock.

Amazon shares hit 3762 on November 19. This was shy of the all-time high of 3773 set back in July ahead of its Q2 earnings. The stock was unable to find buyers above that level, leading to whispers of a ‘double top’. 

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Expectations for rising interest rates and concerns around higher expenses started to weigh on the name. AMZN closed 2021 down 10% from its November highs. AMZN kicked off 2022 trading at key technical levels- the 200-day moving average and the 50-weekly.

Sentiment faltered, leading the big tech space to bleed lower. AMZN tumbled to 2707 on January 24, down 28% from its highs and in bear market territory.

The stock bottomed over the next few days. Signs of seller exhaustion and a big beat buy Apple (AAPL) led portfolio managers back into the name.

The stock climbed to 3101 on February 2, a tidy 14% rally. A poor round of results by Meta Platforms (FB) would disrupt this bounce. AMZN would give up most of its gains and fall back to 2776.

Was this a disruptive gap?

No. A disruptive gap occurs when a perceived change of value in a stock lead to damage around key support levels. The FB results were company specific. The stock never broke below the 2707 lows. Not only did support hold, but it was also never truly tested.

This was a combination of fast money bounce players cutting losses and some further capitulation by sellers who lamented not selling in the November through January decline. Portfolio managers with longer-term horizons would not be selling in this situation. That set us up for what would occur next.

AMZN provided an impressive round of results the following day. It posted a strong performance in its cloud AWS unit. Advertising beat expectations, proving the FB results did not reflect industry trends. Operating Income handily outpaced projections. The company announced it would raise the price of its Prime membership to offset rising expenses from its retail division. 

Investors flocked back into the stock, driving it up an impressive 12% or a whopping $190 billion in market cap. This outpaced the $179 billion market cap by Apple just two weeks prior. This reflected the strong base built up over the prior week.

AMZN did trade in a wide range that day. The highs were $3224, the lows were $3012. Importantly, it closed near the highs at $3152. Again, reflecting a stronger base.

The momentum would continue as AMZN eventually rallied to test the 50-sma at $3254 on February 7.  The stock did see some resistance at the 50-sma, sliding to $3033 on Valentine’s Day before closing the session at $3103.

What did we learn from this trading activity?

The one day sell off in reaction to the FB results likely wiped out old holders and set up stronger support as a new class of investors entered the playing field. To confirm this theory, shares of AMZN need to hold above the February 7 lows of $3012. The stock slipped to $3033 on Monday but rallied into the close. Evidence that the stock can hold above $3000 will lead to buyers stepping in.

If we take a step back and look at the monthly, we can see AMZN has traded in a tight range between $3000-3700 since August 2020.

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While shares of AMZN were volatile around earnings report, it is not evident that there was a clear change in perceived value. 

The key for AMZN is holding the $3000 level. At some point AMZN will need to establish a break above the 50-sma. But as long as it holds support, investors can feel confident that the new class of portfolio managers will protect against big declines in the stock.