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Looking at some of the top performing stocks over the last few months, one of the biggest names that stood out is Amazon.com (Nasdaq: AMZN).
The stock had slipped from late July through the middle of January, falling over 20% during the slide. The decline started with a gap down after an earnings disappointment last summer. The stock did bounce back in August, and filled most of the gap, but then the selling pressure hit again and the stock slipped from the $350 area down to the $285 area.
We can see on the daily chart above how the stock rallied from mid-October through the end of November, jumping from 20% from that October low to the November high. However, once again the stock got hit with some selling pressure and that took the stock right back down to the $285 range in mid-January. Again the stock rallied and then got a huge boost when the stock gapped higher on the late January earnings release.
The recent rally had put the stock in overbought territory based on both the 10-day RSI and the daily slow stochastic readings. The rally has slowed in recent weeks and that has allowed the daily oscillators to move out of overbought territory.
Turning our attention to the weekly chart, we see that the weekly oscillators are in overbought territory presently and we see that the slow stochastic readings just made a bearish crossover.
Looking at the two previous instances where the slow stochastic readings were in overbought territory and there was a bearish crossover from the two, we get one instance where the signal was a good bearish signal and one instance where the stock continued to move higher for another three months before it eventually dropped over 30%.
So we have a stock that is overbought on the daily and weekly charts, but that hasn’t necessarily meant a selloff was coming in the past. How do you decide whether to short the stock or not? My suggestion is to look at other indicators and I usually turn to the sentiment indicators to look for other possible drivers for a bearish trade.
Looking at the sentiment indicators, we see a low short interest ratio (1.6), a high put/call ratio (95th percentile) and modest analyst ratings (27 buys, 16 holds, 1 sell). These readings combine to give us a sentiment composite reading of 10.21. I would consider that a neutral composite reading.
So what do you do? Because the stock is as overbought as it is, I certainly wouldn’t be looking to buy it at this time. Am I ready to make a big bearish bet? Not really, but if someone put a gun to my head and said make either a bullish bet or a bearish bet, I am making a bearish bet.
If you own AMZN, you might want to buy some protective puts in case there is some profit taking in the next month or so or sell part of your position. If you are looking to buy AMZN, I would wait for a pullback that takes AMZN out of overbought territory on the weekly chart. As for shorting the stock, if I was shorting it today, I would set a stop up above the $410 level and target the $300 level as the place to take profits.
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