Click here to Email this article
This post will use AMZN as a trade but it is not in any way a suggestion to buy or sell anything - Read Disclaimer.
I've been sharing with other fellowship members in The Hub some of the tools I use and trying my best to use examples without giving stock-tips. This next trade was posted to explain how to use the following:- Support and resistance. (click here and here)
- Gaps (click here)
On January 15, 2010 and in the chart above, I showed how the resistance @ $125.68 (yellow circle) turned to support few days later after it broke. It continued to do the same for two month holding the stock from falling below $125 but unfortunately with lower highs every time it gets tested. I suggested that test spots (green circles) were good defined risk/reward spots for longs with stops @ $125 area.
That doesn't mean only longs can go there. This setup can be traded in a million and one ways, which I hope you readers will share how you trade it in the comment section. I suggested some on the chart above.
I updated the chart - Click here, here and here in the following days to show how the support was clearly playing out.
On January 22, I offered one way to trade AMZN options by buying AMZN Feb. $140 call +QZNBH @ $2.26 expecting the $125 level to hold for now so we can play out the bounce and see what will happen. I also suggested we can buy AMZN March $115 put +QZNOC @ $3.85 to hedge against the call. I decided to go with the call only, which is an added but defined risk that fits with my risk tolerance and profit goals.
As you see from the chart above, the next day AMZN held the $125 level in the morning where the volume was neutral but the fight continued for every tick near or at $125 after losing that important print earlier (old support is new resistance rule). I warned that if the market won't flip the switch to the up side, $125 might never seen again for long time.
Soon after, large bearish volume came with the market fall and a long red tail went bleeding on AMZN chart as you can see below per my suggestion earlier to watch for an all-out break once this support giveaway.
That wasn't the case with my trade. I was sitting on a loss of 39.8% because I went only call and this is where another technical analysis came to play. As you see from the chart above, I went to mention that the last hope for AMZN bulls is to hold the $120 level because that level closed the gap from early November, which was very possible. I said that unless the market breaks apart next week (which I won't mind at all but not counting on), a bounce will help AMZN at least touch $125 back (broken support) as you see happened from the next chart.
So today, my call came back to life and more, I decided to keep it but hedge against it with 2.5 times put +QZNOC @ $4.90 in expectation of a volatile earning announcement.
After hours tonight, AMZN went quickly to $115.48 and as high as $131.60 and currently at $128.95. In either case which AMZN will go tomorrow, chances are great I will be making money and have many options to keep both, close one and keep the other, add to one while keeping the other or many other options.
I hope I showed you how a simple Technical analysis can help you make sound judgments in your trades instead of relaying on hunches and stock tips. I will keep you posted with an update to this trade in the Hub and how it went.
Note: This trade decision was based on more complex analysis than the one laid above alone. I just took the most basic out of it to highlight for those who have a desire to learn about technical analysis. There are other factors such moving averages, volume analysis, other technical indicators, option volatility, current market trend and sentiment, Elliott wave analysis, and few other things. All in all, I hope I did a good job in communicating clearly what I intended.
Did you join the fellowship? Are you a leader? Come join us!
As usual, I wish you as much as you wish for yourselves. Be happy!
GoodVibe
Mr. Lucky
~ Please, rate this article at the top of the page.
