Will Amazon’s revenue follow the trend?

After trending lower for most of the quarter, shares of Amazon.com, Inc. (AMZN) rallied ahead of the company’s fiscal fourth quarter results. Following the tech sector’s sell-off at the start of 2022, Amazon shares moved to an extremely low range based on historical volatility, but recently trended higher over the past week. Analysts expect the retail giant to report earnings per share (EPS) of $3.54 and revenue of $137.63 billion. After the company missed expectations for the prior quarter and offered a weaker forecast, investors will be looking to see how Amazon handled macro factors affecting its results.

While not a pure tech stock, Amazon has apparently tracked the tech sector’s sharp pullback from pandemic-era highs. Amazon shares have lost 11.2% since the start of 2022, a bigger loss than the S&P 500 index and the Nasdaq index. This could partly be because Amazon is in the consumer discretionary sector, which has been one of the worst performing sectors recently as inflation-driven sector rotation has gained momentum.

Ahead of earnings, option traders appear to be positioning themselves for Amaozn stock price to decline. This is because open interest has more put options than call options, and the implied volatility suggests that traders are selling the call options up while buying the put options down. the decline.

Almost all of the “big name” mega-stocks saw declines in early 2022. However, several saw pronounced bullish activity in stock prices after reporting earnings. It should be noted that the stock prices of Apple Inc. (AAPL) and Microsoft Corporation (MSFT) rebounded higher after options traders took similar positions ahead of their earnings reports.

Key points to remember

  • Traders and investors have driven down Amazon’s stock price since the start of 2022.
  • Amazon’s stock price has recently risen, closing just below its 20-day moving average.
  • Amazon stock price is approaching a volume-based sell zone.
  • Calls are priced higher than puts after accounting for intrinsic value.
  • The open interest in buying and selling seems to be positioned for the price to decline in the short term.

price action

A comparison between technical analysis of the stock price movement and recent options trading activity can give chart watchers valuable insight into general sentiment toward Amazon shares ahead of the earnings announcement. The chart below illustrates recent Amazon stock price action as of Tuesday, February 1.

The chart illustrates the steady decline in Amazon shares after the company reported earnings for the last quarter and faced resistance at the 20-day moving average, represented by the middle line of the purple bands. The stock price fell to an extremely low end of the volatility range in late January, before recovering slightly ahead of earnings.

The purple bands on this chart are a range of extreme historical volatility formed by 4 standard deviations of 20-day Keltner Channel indicators, which represent price levels that represent a multiple of the average true range (ATR). The ATR is a standard tool for illustrating historical volatility over time. These ranges could be considered to represent the extreme ranges of option prices.

Point

the mean true range (ATR) has become a standard tool for describing historical volatility over time. The typical average duration used in its calculation is 10 to 20 periods, which includes two to four weeks of trading on a daily chart.

Note that these bands narrowed briefly in early January and appear to be widening as earnings approach. This could mean that option pricing increases before Amazon’s earnings announcement, which could translate into investor uncertainty about the report.

Amazon’s stock price may be facing some macro headwinds right now. Investors appear to be fleeing the consumer discretionary sector in anticipation of higher interest rates and a shift to the next phase of the business cycle.

The chart above compares Amazon’s recent performance with its sector, as represented by State Street’s Consumer Discretionary ETF (XLY), and the market as a whole, as represented by the S&P 500 Index ETF. State Street (SPY) and Invesco’s Nasdaq-100 ETF (QQQ). This graph shows how far Amazon has fallen behind the market as a whole and its industry.

Also on the chart are State Street’s consumer staples ETF (XLP) and technology sector ETF (XLK). Amazon is frequently grouped with the mega-cap tech stocks that make up a large percentage of XLK’s holdings, commonly known as FAANG stocks. While Amazon is perhaps best known for providing consumer goods as an online retailer, much of its business comes from its internet hosting services known as Amazon Web Services. It is therefore worth comparing.

The Consumer Staples sector, represented on this chart as XLP, could be considered useful for comparison to Amazon’s Consumer Discretionary sector. XLP sector stocks tend to be slow and steady growers that tend to provide strong dividends. XLP is considered a safe sector in times of inflation, unlike XLY, which tends to contract in times of inflation.

This contrast between XLY and XLP can be seen as a “wants vs needs” comparison, as consumers tend to spend more on basic needs in times of inflation than on wants. Chart watchers should recognize that over the time period on this chart, XLP has outperformed not just XLY, but the market as a whole.

Point

the Keltner channel indicator displays a set of semi-parallel lines based on a 20-day simple moving average and an upper and lower line. Since the upper lines are drawn by adding a multiple of ATR to the average and the lower lines are drawn by subtracting an ATR multiple from the average price, this channel indicator is a great visualization tool for plotting volatility. historical.

Volume Profile and Options Outlook

Comparing price action and options trading can provide chart watchers with insight into how traders and investors feel about a company’s future performance. However, additional price action context in terms of volume could illustrate areas of support and resistance, which could provide additional context for open interest on options. The chart below illustrates Amazon’s recent price action, in addition to a price-based volume pattern on the left side.

This price-based volume model represents the prices at which investors have bought and sold stocks previously. A noticeable amount of buying in the past often means that investors will feel the desire to defend their positions at those same prices by buying more shares or at least not selling more. When volumes at a given price are low or non-existent, it implies that few, if any, investors need to defend their positions at those levels.

Amazon’s stock price has recently risen towards a thin area of ​​heavily sold volume, highlighted by the red rectangle. This area could turn out to be a resistance zone on the upside if Amazon were to have a favorable earnings report.

Options traders appear to be positioning themselves for a bearish move in equities in the near term. While recent trading volumes favor calls over puts 76,000 to 57,000, open interest includes 372,000 calls versus 393,000 puts. These numbers give a mixed feeling towards Amazon, but further analysis sheds light on additional details.

For Feb. 4, the next weekly options expiry date, it looks like options traders are selling out-of-the-money calls while buying out-of-the-money put options. The implied volatility of the upside calls is decreasing as the open interest increases, suggesting that option traders are taking short positions in these options. Similarly, the implied volatility of downside put options increases as open interest increases, indicating that traders are buying these options.

Wrap

Amazon’s stock price fell from an extremely low range to the 20-day moving average ahead of earnings. Options traders appear to be selling upside calls and buying downside puts, implying bearish sentiment. If those bets were to play out in a post-earnings share price reaction similar to that of Apple and Microsoft, it could put unexpected upward pressure on Amazon’s stock price.

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