I'm Bullish on Amazon Ahead of Earnings

 | Jan 28, 2016 | 1:30 PM EST  | Comments
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,

msft

We got the early fade I was looking for today, but there has been absolutely no follow-through. Instead, we have chop rather than trend. The biggest issue I see for bulls is working off oversold conditions in the SPDR S&P 500 (SPY) without going anywhere. Before the last flush lower, I outlined $190 as an important line for the bulls to hold. They failed and we saw $180 in quick fashion. Now the bears need to hold $190, but they are succeeding whereas the bulls failed. For now, I remain in the cautious camp.

Earnings provide individual names to consider outside of the craziness in equities and oil. I'd rather pay closer attention to earnings than OPEC rumors. If you aren't starting the rumor, then don't be involved in playing. (Side note: Don't start rumors!). Amazon (AMZN) and Microsoft (MSFT) are the biggest two tonight, while biotech supporters are probably hoping Amgen (AMGN) can bring back sanity to the group. For now, I'm just focused on AMZN and MSFT.

If you look at the two charts -- and I promise they are two different charts -- you'll see exactly that: twins. There are some differences, but there are so many similarities it is a bit scary.

The price pattern and movement of the moving averages is almost identical. Everything bearish in terms of indicators on Amazon is also bearish on Microsoft. The one slight difference here is it looks like Amazon is maybe one day ahead on strength. And if I had to pick one to be more bullish upon, it would be Amazon. Microsoft is a bit more coiled in terms of price, but I expect the stock to stay within the yellow zone, which is where options are pricing the overnight move. The escape velocity to the downside (red) appears more vulnerable to a big move than the upside, so I would be more inclined to chase an afterhours short. Should Microsoft trade over $55, I might consider a trade to $57; otherwise, I would look to short a move back under $55.

I'm a little more optimistic on Amazon. A move above $660 will propel the stock to $700 over the next week. The $550 area looks very important as well. Not only is it the low of 2016, but options have it as the floor. Amazon is a name where the escape velocity has meant something in the past. It is also pertinent to watch moves into an escape zone (red or green) and then a reversal back into yellow. Amazon was infamous for this in the past, but not recently. If I were taking a position into earnings, then I would use any move outside of the yellow as a place to hedge my position partially, assuming the move correlated with my position. In other words, if you are a long a put and the stock fell below $550, I would consider either buying 50 shares or buying 100 shares if it moved back above $550.

One last note: Amazon has moved up $10 over the 30 minutes as I outlined these charts, so there is certainly optimism going into today's report. I'll post an updated chart on Columnist Conversation with around 30 minutes to go in the session.

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