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After Amazon.com's (AMZN) last earnings at the end of January, I recommended buying the stock (or call options) right at the open based on historical trading patterns (see "Why Amazon.com Was A Buy At the Open After Reporting Earnings"). That trade was a huge success as AMZN's record for buying the post-earnings open since 2009 grew to 8 positive gains and 5 losses in the two weeks following earnings. This time around, I am a little more wary.

AMZN traded up 14% in the after-hours session following earnings. If AMZN holds those gains into Friday's close, this performance would rank as the third best since 2009.

(click to enlarge)Amazon.com One-Day Post-Earnings Performance Since 2009

Amazon.com One-Day Post-Earnings Performance Since 2009

After the two top performing one-day, post-earnings performances, AMZN still delivered positive gains in the subsequent two-week period. See the first and fourth rows highlighted in yellow in the updated table below:

(click to enlarge)The Performance of the Amazon.com Two-Week Post-Earnings Trade

The Performance of the Amazon Two-Week Post-Earnings Trade

See the original post for a complete analysis of these data). Here is an explanation of the columns again:

  1. Post-earnings trading date: the day after Amazon.com reported earnings. Amazon delivered each earnings announcement in this three-year sample after the market closed for trading.
  2. Stock price: the open, close, high, and low stock prices are recorded on the post-earnings trading date.
  3. 2-week return, NO stop loss: the percentage return, positive or negative, from buying the open or the close on the post-earnings trading date and selling exactly two trading weeks (10 trading days) later with no stop loss.
  4. Stop loss date: the date at which AMZN FIRST closed below the low of the post-earnings trade date. If AMZN never tripped this trigger in the two weeks of trading, I left the cell blank.
  5. Stop loss price: the closing price for AMZN stock on the stop loss date.
  6. 2-week return, WITH stop loss: the percentage return, positive or negative, from buying the open or the close on the post-earnings trading date and selling exactly two trading weeks later. If the trade stops out before two weeks, then the return is measured up to the stop loss date.
  7. Aggregate return: A sum of the percentage returns in the related columns. This trading strategy delivers these returns if profits are NOT reinvested into additional trades and the same amount of money is invested for each trade. This calculation makes it easier to understand the differences across these particular trading strategies.

What makes me wary is that these two other large performances occurred in 2009 during a much more volatile period of trading. AMZN was also trading at much lower prices and a much lower valuation. I have to believe delivering a strong two week performance will be much harder with the stock trading near all-time highs and the NASDAQ trading near 11-year highs. To accommodate what I perceive as higher contextual risk, I am calling an "audible" here and recommending that traders wait until AMZN dips during the day.

I cannot say how much of a dip is "enough," but the bigger the pullback, the higher the odds for the post-earnings trade to work. At $220, AMZN is once again reaching into its nasty October post-earnings gap down. AMZN has not traded this high since then. The chart below shows that at $220, AMZN is extremely over-extended as measured by the Bollinger Bands (BB) which are an approximate measure of the expected volatility in a stock. A potential target for a pullback is the brief high from March around $209. A pullback to $200 and the 200DMA would be ideal but highly unlikely. I will be mitigating risks by targeting a call spread for purchase.

(click to enlarge)AMZN will once again reach into its October gap down after easily clearing the stubborn resistance at the 200DMA

AMZN will once again reach into its October gap down after easily clearing the stubborn resistance at the 200DMA

Source: FreeStockCharts.com

Note that the stop-out rule still applies: exit the bullish position if AMZN closes below the low of the first day of trading. If AMZN does break that low, it becomes a candidate for shorting.

Be careful out there!

Source: Calling 'Audible' On Amazon Post-Earnings Play: Buy The Dip, Not The Open