Trading Amazon’s Negative Gap

Negative gaps leave lasting scars on price charts, often forming formidable resistance levels upon retest. As Amazon approaches the critical area formed by its August 2nd gap, let's explore two strategies for navigating this retest.

Understanding Amazon’s Negative Gap

On August 2nd, Amazon’s share price experienced a significant negative gap, opening over 12% lower than the previous close. This drop was driven by the company’s disappointing earnings report, which highlighted slowing online sales growth and increased competition from low-cost retailers like Temu and Shein. Despite strong results in Amazon Web Services (AWS), the market’s reaction was swift, as investors grew concerned over consumer trends and competitive pressures.

The negative gap left a distinct resistance zone on the chart, marked by the gap’s top, which now coincides with several key technical levels, including the VWAP anchored to July highs and a descending trendline connecting recent swing highs.

Amazon (AMZN) Daily Candle Chart
snapshot
Past performance is not a reliable indicator of future results

How to Trade Amazon's Negative Gap

Traders can approach Amazon’s negative gap with two distinct strategies, depending on their risk tolerance and trading style:

1. Aggressive Approach:

Entry: Wait for the price to close the gap by reaching the resistance zone near the top of the gap.

Confirmation:Look for bearish price patterns to form on lower timeframes, such as a small double top or a bearish engulfing pattern on the hourly chart.

Stop Loss: Place the stop loss above the descending trendline and use a multiple of the Average True Range (ATR) to account for short-term volatility.

Target: The target for this trade would be a retest of the August lows, capitalizing on the potential rejection from the resistance zone.

2. Less Aggressive Approach:

Entry: Wait for a break and close below the ascending trendline that has formed during the recovery rally.

Confirmation: This would signal the formation of a new lower swing high, indicating a potential reversal.

Stop Loss: The stop loss can be placed above the newly formed swing high.

Target: Similar to the aggressive approach, the target would be a retest of the August lows.

Conclusion

Navigating Amazon's negative gap requires a careful assessment of the price action that forms around the confluent resistance zone created by the gap. Whether opting for an aggressive entry near the gap top or a more cautious approach following a trendline break, understanding the technical landscape and implementing risk management is crucial in executing a well-informed trade.

Disclaimer: This is for information and learning purposes only. The information provided does not constitute investment advice nor take into account the individual financial circumstances or objectives of any investor. Any information that may be provided relating to past performance is not a reliable indicator of future results or performance. Social media channels are not relevant for UK residents.

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