AMZN – Should you or shouldn’t you?

Following its earnings report AMZN has been highlighted as a CoPilot pick and several of you have asked should you or shouldn’t you go for it.  

The quick answer is it’s up to you, but I will give you my take on it.  

First, the pre-earnings pattern was great as I’d mentioned in a recent webinar.  The pattern was shaping up nicely with new highs and a consistent positive OVI.  The only area of concern being that earnings was about to happen, and that’s always a bit of a gamble, albeit that it looked very promising for AMZN given the strength of the chart and the fact the market has been bullish.  

amzn 2013.10.27.jpg

The big issue we have here is that the stock has already broken out and it hasn’t yet had the chance to consolidate.  If it consolidates from here then I would be more enthusiastic because I then know I can better ringfence my risk.  The ‘issue’ I have here is that the stop is pretty far away at $335.05 and the entry is just $0.01 above Friday’s close (ie not even having to break to new highs).  This is how the CoPilot works for stocks that have already broken out of the consolidation.  It does this because historically that has worked in the past.  But I personally have a fear of heights for this type of scenario – that’s just the way I’m built.  And in this particular scenario the gap is pretty large which has an domino effect on the P1 and stop also being quite far away.  

For me personally that’s a bit hot and I intend to use my discretion here.  I’m confident of AMZN’s prospects long term, I’m a fan of the business model and of the chart.  However, trading is also about managing your risk and emotions.  For me the initial stop is risky for two reasons.  First it’s quite far away, and second it would be triggered if the price closes the gap before potentially rebounding for the P1 target.  Gap closing is a common occurance due to the phenomenon of profit taking.  

One reason for the stop (and P1) being far away here is due to the Average True Range having been stretched due to Friday’s gap.  Before Friday you’d have found the P1 and initial stop would have been much closer.  That’s just the way it is.  But the effect on this particular trade is that the distances are further and hence the risk is increased.  

In the past you can look back and see that the CoPilot has unearthed trades like this that have become big winners, but also the larger losers.  An earnings gap can be the start of a big up move – if you looked at a similar situation with FB in July it gapped on earnings and kept going.  But you must be aware of the risk too if you want to play that particular game.  

So, in conclusion, as a conservative investor, I personally would prefer to see a consolidation occur and then on a breakout of that, then I’ll be interested with a more conservative stop and P1.  

All the best

Guy