Watching AMZN for Put

[dereksas]

As I’ve said, I am currently leaning towards a down market and I have been looking for weaker stocks in the Mag 7 to ride down with puts. I just used TSLA which I thought was weaker than the market as a whole a couple days ago, and I had a nice profit on a day trade. Of all the stocks in the Mag 7, TSLA had the weakest performance over the last two days and I could continue to use it, but I am now looking at AMZN which is interesting for other reasons.

As I explained here:

Day Trade Put on TSLA

Okay, so if I am going to trade puts to take advantage of what I see as market weakness then I can trade SPY, but I would probably do better to pick a stock that is showing more weakness than SPY. When I look at recent history from the recent start of the hard drops (basically 1:00pm on 10/12) some high-volume stocks went down more than others. The ranking is as follows: TSLA -4.9% NVDA -4.4% META -4.3% AMZN -3.0% GOOG -2.0% AAPL -1.8% MSFT -1.6% SPY -1.2% So it appears that I picked c…

Of the Mag 7 stocks, AMZN went down by around 3% in the recent downdraft that started 10/12. Three others went down more including TSLA which I traded down with a put, but also NVDA and META but those two were relatively strong in the last month so the last couple of days might have just been an overbought reaction without much follow through. Now, since I made that post, I looked at all of the Mag 7 + SPY over the last month (9/14 - today) and this is the ranking of gains (or losses):

AAPL +1.6%
META +0.6%
NVDA -0.3%
GOOG -0.6%
MSFT -3.6%
SPY -4.3%
TSLA -9.2%
AMZN -11.0%

So, AMZN was one of the biggest losers over the last couple of days and they were also the biggest loser over the last month, losing more than double the loss from the rest of the market (S&P 500). Now, AMZN had a super earnings report in early August gapping up by more than 9%, but by the end of September they had traded down well past the bottom of this gap basically making their stellar report meaningless to their stock price. This is a bad sign.

Since their recent bottom on 9/28, AMZN has been trending basically upward until the 10/12 top. But I really did not like the action all the way up which I thought was volatile. As I have said many times recently in many different threads on Fool, I look at volatility as bearish even if it is volatile in an upward direction. The following is an AMZN 30-min showing all the air in the chart:

As I explained in this post, I view lots of gaps as an extreme version of volatility:

Is S&P about to start a bearish trend?

Well, it actually got down to 443 on Sept 7 which is close enough to my prediction. The following chart is an hourly showing all the marks I made on the previous chart as well as a placement for my prediction (B). But now the pattern since 9/1 has me a bit puzzled. You all know how I feel about volatility being bearish, even if you are moving upward. But the SPY chart since 9/1 has a lot of air in it. [SPY Hourly 2wk 9-14-23] I guess I feel like gaps are a form of extreme volatility. If you …

In that post I correctly predicted the down move on SPY. But if you look at the chart in that post and compare it to the chart I just posted you can see that there are many similarities. In both cases, there was an uptrend over days with many gaps culminating in a strong up move (strong up can be a bad sign of volatility) followed by a strong down move.

When I look for an intraday entry, I typically go by the 5-min chart. The following is the chart I would use:

[dereksas]

According to this chart there is a soft put entry based on the oscillator divergence. I say it is soft because the price chart did not show a higher high. Now an equal price could be viewed as a double-top so the entry would be valid, but I would feel better if the last price was higher than the last high while the oscillator shows a lower high. Now, we don’t have any idea what the action will look like when the market opens on Monday. Maybe there will be a slight gap up that will satisfy my conditions perfectly but we’ll just have to see.

The last chart I want to show is the same 5-min chart, but from a public source that is available to everyone:

The oscillator on the bottom is called the “Pretty Good Oscillator” which is my favorite on Yahoo Finance. They also have a Chande oscillator which is one that I always use on TradeStation, but it does not work exactly the same.

The interactive charts on Yahoo Finance are truly real-time and are not delayed as far as I can tell. I am showing the Yahoo chart to show that everyone has access to usable charts without subscribing to a service or broker just for charts.

[dereksas]

I feel like I need to explain something about how I use the oscillators. I look at it as something that gives me a somewhat higher percentage of success on an entry (or exit), but not something that can give you any assurance of longer-term trends. You have to make those assessments in other places. Oscillator divergences (Chande, RSI, or Yahoo’s Pretty Good Oscillator) can be a great help, but they are not perfect. If they were perfect, I would be a billionaire and keep them totally secret. They are often correct, but are also often wrong. That’s the first point.

The second point is that even if they give you a good entry that works out just as advertised, you cannot assume anything about how long it will last. Generally speaking the longer the chart, the longer the predicted move will last. So, on a daily chart, you are predicting a reversal and resulting move that could last for days or maybe even weeks, but more likely less than a week. Now, if you are day trading like I am, then you will more likely use a shorter timeframe. I like to use the 5-min chart, but my rule is that I will only look for the move to last an hour. Now, it could last for many hours, but you can never know this. I make my entry, set my stop, and hope for 12 bars in the direction I want (12 x 5-min = 1 hr). I don’t usually watch the 1-min chart because any signal I get from such a chart will have such a short half-life that I don’t really feel like it’s worth very much.

My third point is that because of the half-life discussed above, you really cannot use divergences that happened in the past, even very recently. For instance on the AMZN chart, there was a longer term 3-point positive divergence that would seem to indicate a reversal to the upside (in red on the chart).

Now, a 3-point divergence carries a bit more weight than a 2-point, and given the length of the divergence, you might think that the reversal might last as long going up. You cannot think like this. Now, if AMZN went down to an even lower low than yesterday at 1:30pm and the oscillator still kept trending up, then you would have a 4-point divergence, and likely I would trade this up as a call, but I don’t see this happening. The 3 point divergence ended at 1:30 and in fact resulted in a reversal and up move that lasted for 2 1/2 hours on a 5-min chart. I believe that the up move already occurred and now we are looking for a break of downside consolidation and continuation of the downtrend to possibly challenge the September lows.

Like I always say, unless I’m totally wrong.

[physician]

TSLA and NFLX have earnings reports due this week. How do you look at these during a week like this? I find it hard to evaluate what is going on with the Israeli war news impacting the markets…doc

[dereksas]

@dereksas

According to this chart there is a soft put entry based on the oscillator divergence. I say it is soft because the price chart did not show a higher high. Now an equal price could be viewed as a double-top so the entry would be valid, but I would feel better if the last price was higher than the last high while the oscillator shows a lower high. Now, we don’t have any idea what the action will look like when the market opens on Monday. Maybe there will be a slight gap up that will satisfy my conditions perfectly but we’ll just have to see.

Well, we had a small gap up that initially looked like it satisfied my conditions, but AMZN continued to trade almost straight up for ~25 minutes stronger than the overall market so I think that this possible put is just going to have to be a pass for now.

[dereksas]

@physician

TSLA and NFLX have earnings reports due this week. How do you look at these during a week like this? I find it hard to evaluate what is going on with the Israeli war news impacting the markets…

I currently am not putting a lot (any) weight on the Israel news where my trading is concerned. The market doesn’t seem to care very much. Now, if it were to result in relatively significant terrorist incidents within the US, then I think it may cause a general negative sentiment, but we don’t have that yet.

Regarding earnings, yes, we are starting this quarter’s earnings and over the next month every single public company will be reporting. TSLA, being a member of the Mag7 might be worth an options trade. I’ve never looked at NFLX so I don’t know how the volume and spreads are for them. Regarding TSLA, I have been trading them going down because they have been relatively weak, which seems to suggest that traders are pessimistic about earnings. But if I trade TSLA my goal would be to close before their earnings announcement because as soon as the announcement is made, the options volatility premium will disappear wiping out significant profits. I don’t think I would try to trade a strangle to capture profits as a result of earnings. I might trade them right after earnings, but that depends on what I see.

[physician]

I have Netflix. The thing I wonder about netflix is how will them cracking down on people sharing with family/friends impact their revenue. They really can only significantly increase revenue in two ways (as far as i know)- increase fees (which they are doing) and increase subscribers which is the unknown. Another thing, I am wondering what other things they could do to impact subscribers and maybe they would buy another company to compete in the live streaming arena or add to their already huge library of shows (buy a competitor) - they do have a lot of good shows but they don’t seem to be getting too many of the new movies. If I knew the answer to the above, I might be able to make an educated guess on an options play but the chart has been negative (wish I would have bought a put)…doc

[dereksas]

You’re funny, Doc. You give me a whole lot of fundamentals, then tell me that you are thinking about trading options. I don’t think that there is one thing that you said before your last sentence that would have any impact on my trading options on NFLX. Now, looking at NFLX, yes, they have looked terrible over the last month and particularly terrible the last week. Currently (10:18am) they appear to be consolidating starting Friday AM for a continued move downward. I see an RSI-Chande divergence right this second for a put entry, but it is 2-point which might be risky. 3-point would be more sure, but we might not get that.

[dereksas]

Okay, I just looked at the NFLX options. The premiums seem very inflated, probably because of upcoming earnings. If I trade NFLX I would definitely try to get out before earnings. The bid-ask spreads are wide compared to SPY, but not too bad. Maybe 0.08 to 0.10 for a $2.00 option. This is for an expiration this Friday.

[dereksas]

@dereksas

AMZN continued to trade almost straight up for ~25 minutes stronger than the overall market

But then it stalled while the rest of the market raced, so now it looks weaker than the overall market. I’m still watching, but there might be others that are better trades.

[dereksas]

AMZ had a nice negative divergence entry for a put at 1:05pm, but I missed it because I was away. Oh well. We’ll see how it goes…

[dereksas]

@dereksas

AMZ had a nice negative divergence entry for a put at 1:05pm, but I missed it because I was away.

Good thing I missed it. AMZN went down a bit which would have made it look like a good entry, but they finished higher from this exact point. Almost all of the Mag 7 also finished above this point except for MSFT which finished slightly lower. SPY also ended slightly lower.

As some may have seen in another thread, I entered a SPY strangle a bit before this point (12:45?), but I left and wasn’t watching after this because on a strangle you don’t really care which way it goes and there is no need for an actual or mental stop.

[physician]

@dereksas

You’re funny, Doc. You give me a whole lot of fundamentals, then tell me that you are thinking about trading options. I don’t think that there is one thing that you said before your last sentence that would have any impact on my trading options on NFLX.

I guess I look at options more from a long term investor perspective and you know - I didn’t realize it. Thanks for pointing that out to me…doc

[dereksas]

Hey Doc, congrats on NFLX!!!