Amazon Apres Le Deluge
A few days ago, we alerted readers to the short-term overbought conditions in Amazon.com (NASDAQ: AMZN) as the stock headed towards its quarterly earnings report (see “An Overbought Amazon Advances Into Earnings” from last Friday).
Specifically we wrote:
What traders and active investors may want to focus more attention on, however, is the fact that AMZN, which has been trading in bear market territory for more than two months, has rallied for four days in a row and become short-term overbought. And unless Amazon.com does to analyst expectations what Apple did, the likelihood of the stock succumbing to overbought extremes and reversing lower is strong.
Three days later, shares of Amazon.com are trading lower by more than 8%.
Traders who noted the overbought conditions in AMZN were not only able to avoid a sharp drawdown in the stock. Those traders who look to sell short strength in bear market territory were actually able to fade the rally in Amazon.com as it advanced into earnings.
Right now, the big question is what to do next. Is it time to buy Amazon.com or does the stock likely have further to fall?
Heading into trading on Thursday, the stock already has a short-term positive edge of more than 1%, and is trading near technically oversold levels. At the same time, Amazon.com is and has been trading in bear market territory since mid-November. And while oversold markets do snapback even when those markets are below the 200-day moving average, the odds of such bear market stocks making significant short-term bounces from oversold conditions are not as strong as they are for their bull market counterparts (i.e., stocks trading above their 200-day moving average).
As such, trading Apple to the upside right now would likely represent a “special situations” trade for those who pursue it. There’s no denying the short-term oversold condition of the stock, but the fact that it has traded below its 200-day moving average means that traders should be wary of overcommitting to the possibility of a significant, near-term upmove. If there is one place where oversold stocks have demonstrated a tendency to remain oversold, then that place is below the 200-day moving average.
Want more stocks? Read our latest from 7 Stocks You Need to Know: Trading a Double Shot of Peet’s Coffee and Tea.
David Penn is Editor in Chief of TradingMarkets.com