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Amazon.com Inc (NASDAQ:AMZN) dropped sharply on Friday and closed down nearly 10% after reporting earnings Thursday that disappointed investors. Guidance was uninspiring, which led to a quick liquidation. Amazon.com has now been in business for 20-years, and much to the chagrin of investors, still does not focus on profits.
Results
Amazon delivered weaker than expected results, and guidance was a bit disappointing. Amazon earned $0.23 on revenue of $19.74 billion while analysts were looking for $0.24 and sales of $19.42 billion. Revenue was up 22.8% year over year, though the company barely turned a profit.
While EPS was up from $0.18 a year ago, operating income was actually lower by 19% to $146 million as operating expenses were also up 23%. The company is aggressively investing in content for Amazon Prime, as seen by its deal with HBO, and the launch of Fire TV, but these endeavors will pressure margins in coming quarters.
Daily Amazon Stock Chart
Momentum on Amazon stock has turned negative as the MACD (moving average convergence divergence) index is poised to generate a sell signal. This occurs when the spread (the 12-day moving average minus the 26-day moving average) crosses below the 9-day moving average of the spread.
The 50-day moving average is quickly approaching the 200-day moving average. When the 50-day moving average crosses below the 200-day moving average (known as the “death cross”) a long term down trend is considered in place.
Break Away Gaps
Amazon stock broke down, gapping below trend line support near $308, on strong volume. A breakaway gap occurs when the price of a stock is breaking down out of a consolidation trading range or congestion area. A congestion area is just a price range in which the market has traded for some period.
Volume will generally pick up significantly when a breakaway gap occurs. In the case of Amazon, investors were increasing long position prior to the company’s earnings. Their efforts pushed the stock higher on strong volume on Thursday. The breakaway down gap has caught many investors on the wrong side of the trade, and those investors are now scrambling to find an exit.
Support and Resistance
AMZN broke down through trend line support created by connecting the lows in August of 2013 to the lows in April, which comes in at $308. The next level of target support is seen near the August 2013 lows at $280. Short-term resistance is seen near the top of the breakout gap near $323.
Weekly Amazon Stock Chart
The weekly chart of AMZN shows that the stock has broken through a long term trend line as well as the 50-week moving average. Weekly support is seen near the 2013 lows at $250. Momentum is negative with the weekly MACD printing a reading in negative territory with a downward sloping trajectory that points to lower prices.
Trading Amazon Stock
Investors looking to take advantage of the negative momentum in Amazon stock could short the stock near the breakdown level of $307 per share. I recommend using the top of the gap at $323 to place a stop.
Investors could consider taking profits near $280, which coincides with the August 2013 lows. That would translate into a profit of 7%. Longer-term investor could consider placing a stop near the 50-week moving average at $342, and placing a take profit near the 2013 lows at $250.
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