Amazon May Be A Nice Swing Trading Short...If You Are Smart About It

Feb. 05, 2013 7:33 AM ETAMZN
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Contributor Since 2012

Contrarian daytrading technician who specializes in locating high probability short term trades while predicting price movement directions with over 85% accuracy. Most of my trading involves either extremely short term micro scalping of stocks or commodities (using 1 minute bar charts), or swing trading of stocks overnight. I also specialize in weekly stock option premium selling, along with pre-market and post-market psuedo market maker and stealth trading activity, and selling commodity option strangles (selling delta neutral pairs of far out-ot-the-money puts and calls), with the intent to achieve a steady 1% weekly return. After 32 years, well battle tested, very opportunitistic while putting capital preservation as tantamount. Rehabilitation Counselor over 20 years, M.S., M.B.A., now an around-the-clock speculator. Incorporate seasonals, time of day, and other patterns and methods where high probability price movement patterns can be statistically forecast. Know how to safely go long high beta, heavily shorted stocks; know how and when to use extremes in sentiment to take the other side. I like to fade extreme moves as my proprietary methods are based on reversion to the mean theory. Developed my own scale trading and money management techniques. Will change and adapt my trading style based on current market conditions. I hope to start a chatroom devoted to teaching speculators how to see and capture daytrading opportunities. They say that those who, while those who can't....teach. I want to provide teaching from someone who really can do, someone who knows how to make steady returns while experiencing minimal drawdowns. As a mentor, I would love to share my knowledge and support to help small traders. I came from humble beginnings and have never forgotten it. I want to accelerate the learning curve of my chatroom students so they won't have to make all the mistakes that I have over the years. I am excellent at devising and implementing strategies that can quickly turn a losing trade into a net winner.

If you look at a 3 year daily chart of Amazon, you see that the stock has rallied from a July 2010 low of about $106 to a recent high of about $284. That is a nice move in anyone's book. There is no question that Amazon was a stock to be long during this time frame.

Unfortunately, many value investors missed the move because they felt the stock was overpriced 3 years ago, just above $100, and and even more overpriced now that we are soon approaching the $300 mark. With the tight margins and nearly non-existent profits of this high-flying growth stock, the high PE ratios have made it an ever more tempting short candidate as the price climbs ever higher. Anyone who acted on their bearishness when the stock was trading at $106 has had a painful couple years. However, anyone who shorted this stock from $200 and above, it has not been a total disaster. In fact, ever since the stock hit the $180 mark in January 2011, I believe one could have profitably shorted this stock on a swing trading basis. I will cover that more in detail later.

As the stock moves to higher and higher prices in the future, it will stand out more and more on every bear's radar screen. It will become harder and harder to meet ever higher expectations and with the laws of big numbers, it will reach a point where the stock will top out. And even if the company eventually grows into the lofty valuation of the stock at some point, the stock price will have long since anticipated all the good news and will have already moved either sideways for a decade or more, or it will have already started a slow prepetual long-term downtrend. At some point Amazon has to either put up or shut up. At some point profits will have to come. The longer one waits, the bigger the company grows, and all that many more millions that will be required in order for the profits to be considered meaningful.

Amazon has become a retail behemoth growing like a cancer and destroying brick and morter retailers, one business at a time. I can see this process continuing until one day Amazon might be "The Retailer" in nearly every retail sector on earth. I can envision a world where Amazon captures over 50 cents on every $1 spent on retail in the world, including automobiles and groceries. Due to their large network of warehouses scattered in every corner of the globe, no other company could duplicate their size and coverage. AMZN would be the largest monopoly in the history of man. But even after destroying nearly all the competition, I don't believe their margins will ever be able to increase to the point that they will ever grow into their lofty stock price valuation, as I cannot see any scenario where Amazon is anything but marginally profitable. Amazon was built on low margin retailing. At the pinnacle of their success that I am imagining, Amazon may be able to earn several billions or maybe even a few trillion dollars annually. However, their market cap at that point would be so large virtually all profits would be meaningless. Amazon has already brainwashed the world into expecting low margins and I feel it would be impossible to ever increase margins without being totally rejected by their loyal customers. We will surely never let Amazon change their stripes to fatten their margins even a little. Surely there will come a day...maybe not that far off, when the investment public realizes that Amazon cannot just grow for growth sake since profits will not follow in any meaningful way. Therefore I want to start now by shorting this stock on all rallies to new highs from this time forward. If this stock could have been successfully shorted the last couple years, then all the more easier to short in the future. I believe the challenges in the future for Amazon get tougher and not easier to overcome. A one million dollar cap company can grow 10% a lot easier than a one billion or one trillion dollar cap company. If Apple is already getting hurt by the laws of large numbers, then Amazon all the more so. At least Apple enjoyed a very successful and profitable youth. Apple was bold and beautiful, and one of the fastest growing and most prosperous companies of all times. Apple is reaching midlife now and having a bit of a midlife crisis currently, but it has a lot of momentum and will come back strong. Amazon is well past its youth, and even though it is continues to slave away on its expansion projects year after year, it has yet to prove that it can actually earn any real money. AMZN travels in the highest circles and lives and spends money like it is a member of the elite, and remains highly respected. However, all the praise and status has been gifted to it, based on its potential. AMZN has yet to prove itself able to support itself, let alone be a mover and a shaker as Apple has done these past many years. But the company will surely flower when it is old and gray. Amazon will wow us with their profits when Amazon is mature, perhaps when it ages into its nineties. That is when Amazon will be at its peak performance.......sorry, but no person or company is at peak performance in their then it will be too late. I just don't see it ever happening. All companies start at high margins and over time, margins drop lower as a product matures. Amazon is not innovating or presenting any new products. They are only adding more and more existing products to their over growing network and gaining market share by being the low margin company. Amazon grew early by not charging sales tax. That advantage is now leaving rapidly. Being the cutthroat leader wins market share but destroys profit share. That has always been true in every company and it is also true with Amazon.

But even if I am totally wrong on my bearish thesis, I believe that I have several years of successful swing trade shorting of Amazon to enjoy, while I wait for this profit miracle to occur. The chart below shows what may have happened if one had hypothetically shorted 100 shares of Amazon at $10 increments higher since January 1, 2011. There is just one rule that must be adhered to; once profits are taken, a short only commences at a price equal to or higher than the highest 100 shares previously shorted. Here is the table.

Hypothetical AMZN shorts 01/01/11 to 02/01/13

# Shares Short/price

Next High Maximum Drawdown Profit Target Profit Cuma lative Profit

200 shares @ $180 & $190

$191 ($1,200) $167.50 $3,500 $3,500

100 shares @ $190

$191.50 ($150) $162.50 $2,750 $6,250

200 shares @ $190 & $200

$206.00 ($2,200) $185.00 $2,000 $8,250

300 shares @ $200, $210 & $220

$227.50 ($5,250) $177.50 $9,750 $18,000

300 shares @ $220, $230 & $240

$244.00 ($4,200) $208.50 $6,450 $24,450

100 shares @ $240

$246.50 ($650) $173.00 $6,700 $31,150

300 shares @ $240, $250 & $260

$264.00 ($4,200) $218.00 $9,600 $40,750
300 shares @ $260, $270 & $280 $284.50 ($4,350) ? ? ?

Currently the strategy shows that we are short 300 shares with average price of $270 and with Friday's close of $265 we are showing a $1,500 profit. None of the drawdowns are that severe. We are currently short 300 shares which is the most that this strategy ever got us short at one time in the past before a correction ensued. Thus a correction lower may be in the offing. If I was actually trading this position I would take 100 shares off now at a profit, keeping 200 shares short, so that the drawdown remains manageable if we make further highs to 290 or 300 before a significant selloff is enjoyed. Past bullish pops post earnings usually topped out within 2 to 6 weeks post earnings so I am looking for a short-term top in February.

I am presently not in Amazon but like my chances shorting when trading into new high territory as is currently the case. The table above shows that it is quite possible to make money shorting Amazon, but the most money of course would be to go long on dips and then take profits and go short when this method dictates to go short. I won't be buying on dips but going both long and short was the very best strategy over the past 2 years.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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