All charts in this post are the weekly time frame.
For most of 2021, $AMZN has been consolidating under last year’s high. Five times, $AMZN has broken last year’s high and failed. Four times, the breakout failed within the week. Once, in July, the breakout held for three weeks before collapsing back into range on earnings.
This past week formed the most recent of these failed breakouts.
You could argue this most recent look-above-and-fail is bearish and that we should expect rotation lower once again, but a closer look at the price action suggests otherwise. First, let’s look at the behavior at the lower end of the consolidation zone.
The first test, in April, was the culmination of a run that began in March with a wide-range 2u candle that reversed around the key 2900 zone and formed a strong lower wick. (That 2900 zone is not shown fully in these charts. To see it, open up your own weekly chart and look at the weekly ranges for July, September, and December 2020). The next week’s action opened at halfback, briefly dipped below the retracement zone, but closed above before consolidating for several weeks. That action confirmed the reversal candle and foreshadowed the next month’s run up to all-time highs.
When April’s breakout failed, classical technical analysis told us to expect a rotation back to the opposite end of range, in other words back to 2900-3000. But that isn’t what happened. Instead, we got another hammer candle with a low above 3100. When the next week’s action held the halfback of that hammer candle, we should have expected the consolidation and run up that followed.
That halfback range also held in August (4) and October (5). So although July’s breakout failure and September’s retest failure looked bearish, $AMZN was succeeding in setting a higher base, roughly 200 points above the prior base at 2900.
Now, the question is, which side will break?
Once again, the bottom of the most recently run-up may provide our first clue. The prior three tests of the all-time high started from two-candle patterns with a red reversal bar followed by a confirmation bar that put real pressure on the halfback zone. The most recent run-up was different. The reversal bar showed more energy with a huge lower wick and finishing green. Then, the confirmation bar opened well above halfback, and briefly explored lower before powering higher and finishing on its highs. After consolidating higher for a few weeks price made its next run at the all-time high.
Bears will point out that this run-up has also failed–twice. And that’s true, so far. But the way price has failed so far to hold above last year’s high gives another clue that this time might be different.
In each of the earlier three breaks of last year’s high, the breakout candle was followed by bearish reversal candle that closed below the halfback of the breakout candle. This time, the breakout candle was followed by a doji that is entirely above the prior bar’s halfback, broke last year’s high a second time, and closed green right at its own halfback. It’s also worth noting that the doji candle has held above the minor support formed by the prior high from early September. As breakout failures go, that’s pretty promising. Basically, we’ve just paused to look around.
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So if we were bullish here, how might we play it? $AMZN is a big, expensive stock. It has huge range. And we’re essentially buying a breakout. So we want to be cautious.
One option is to buy OTM condors. These fully hedged positions are relatively affordable and can be tuned to have low delta, positive theta, and reasonable vega. As long as you don’t buy on a spike up in price and keep a reasonable stop, these sorts of positions are reasonably easy to manage and won’t suffer too badly if $AMZN consolidates for a while.
Here are three to consider. Even better, consider doing more than one. Overlaying multiple time frames has an additive effect on Deltas. Each one of the three Condors is between +5 and +8 Deltas, which allows you to tune your delta exposure pretty finely.
Utilizing all three spreads together has the added advantage of spreading the risk over multiple expiries. If $AMZN lingers at last year’s high, the further dated spreads will help the overall position hold more value. And if $AMZN explodes higher, the shorter-dated positions will help the overall position capture more value from the move.
If $AMZN retests the halfback zone of last week’s doji candle, these condors could way to play for a breakout. Stop below last week’s low.