AMZN Update

I just got an email from a member, I remember when he first joined us, he had a good nose for the market, but obviously we have some methods that are very different and require some getting use to and some adjustment as well as some faith. In any case, he took the information provided yesterday, he went long AMZN and short VXX and closed out both trades in the first hour and a half of the market today and made what most people make as a month's salary, he can do whatever he wants with the rest of his day and depending on his financial needs, perhaps the next few weeks or even month or maybe take a nice little trip somewhere because he did EXACTLY what I encourage and hoped Wolf on Wall Street would become; he took some basic information, applied it to his own trading strategy and chose his own trades. He knew that the IWM was in our crosshairs as a long for today which means that volatility will drop (as I mentioned again yesterday in saying there's still time for some more loitering in the area for the VIX), he shorted VXX and went long the extreme volatility in AMZN, which was also shown yesterday as a great looking short term long.

I also like that he wasn't afraid to take his gains, like they say, "Bulls make money, bears make money, PIGS GET SLAUGHTERED". If the assets he closed out go a bit higher, he's not going to kick himself in the rear end and get upset, he made a good chunk of change and he's happy, there's no benefit to kicking yourself because you left some on the table. There's benefit in looking back and seeing if there were things you can learn from the trade, but creating a negative subconscious marker will serve no good, in fact it's likely to keep you in a trade too long and cost you money because you're thinking back to the last trade that you left some on the table. I always look at it this way, "You make the best decisions you can with what you know at the moment, Monday morning quarter-backing serves no purpose, but reviewing the tapes of the game might-it's about attitude. Well Done A.P.!!!

Last night's "Closing Indications" took 5 hours to put together so I hope you take the time to read it. There was also a very clear signal that I mentioned, but just from the over-done status of the market, it was a high probability trade. Really though the AMZN long was from Friday's update, A.P. just put two and two together and made a chunk of change I'd like to have made.

As for AMZN, it has been the recent poster child for volatility on these pages, just check it out...

I have posted (I think it was in last night's post as well) the difference in volatility as well as ATR from the white area to the yellow area. Remember hat I said about volatility, "It doesn't even need to add or subtract anything, it's just big moves up and down, chop", however it's great for trading with the right vehicle. While the trend here is not anywhere near complete (downside), this will likely be the start of the downside move and it's days like the first two red arrows where you make your money or days like the diagonal arrow where you make your money in a trend, when the trend really matures there will be a lot of daily noise.


As pointed out we still have an open Call position in AMZN and yesterday it looked like this...

You can see what it looked like Friday right here, it was primed.

I was explaining to another member yesterday how I will sometimes have two positions  in the same asset like AMZN where there's an equity short and a option long, the equity short is a bigger picture, longer term trade and that's why there's no leverage on it.

The Call option long does two things if the trade works like I planned, 1) it hedges any drawdown in the equity position while it's being put together or waiting for it to make its big move and 2) the call makes money, when the call is sold, I can add to the short at the best prices and lower risk and ideally have extra money in the portfolio allowing for a larger position size and then the short position works. It's an extreme way to hedge, but it is based on the opportunity that is there and using the right tool for the job (the much larger equity short position is hedged by a much less expensive leveraged options position that should not only hedge it, but make money).

OK, so here's the AMZN update and the plan with what we know right now.

 For the trade that our fellow Wolf, A.P. made,  (short term) entered yesterday, he cashed out at the right time, while there was still momentum and before this break of the 1 min 50-bar, but more importantly the stop that would have been where all the traders placed their stops was around $266.45, I'm not sure what that correlates to, maybe some moving average, there's something they were keying off, the orders are visible to really anyone who wants to see them, but the real depth is best understood and best seen by the locals, they knew where to hit it and now AMZN is making an effort to move back above the average.

 Here's the 1 min chart, there was some sharp selling obviously and 3C is just reflecting that.

 The 1 min chart's divergence alone could have meant a consolidation only, add the 2 min chart though and it's 95% going to be more than that. Also note the recent accumulation in a very flat area of trade, I can ALMOST guarantee that this is AMZN market maker/s (there may be more than one and they specialize in AMZN). On these short term charts, with such strong accumulation at such a flat range and so close to the actual move in price, this smells of market makers gathering inventory as they are not only trading their own account for profit, but they have to keep a bid and offer at all times out for anyone who can't match an order with a counter-party, just as long as the order is at market. If you are in the middle of a big move against you and need to get out quick, use a market order, a limit order will likely never get filled, by law the market order must be filled, it may not be the best fill, but when you need to get out, that's the only way to be sure; so the market makers are going to need some inventory for operations as well, although they do have special considerations available to them in exchange for providing liquidity.

 Here's the 3 min chart, this is why I'm ok with holding the AMZN calls as the 3 min is in line.

 The 10 min has a little Head and Shoulders pattern to the left (red arrow) and then we had the earnings open, I warned right before earnings the day before, "Don't worry about after hours, it's the next day's trade and we had a short trade idea out for AMZN that worked out well as you can see. However the 10 min positive divergence is what I want to point out here, another reason I'm ok with keeping the call position open right now.

This would normally tell me that the market or at least AMZN, has a couple of days of upside based on the size of the positive divergence, but because the volatility and ATR are so much wider, the same move that took days or weeks a week ago can now happen in a day.

 Why I'm okay with keeping the equity short position open is right here on the 30 min chart and if possible, I'd add to AMZN or most likely support a new position for those interested, I just don't think we are there yet based on shorter charts. The real eye catcher though is below...

This 2 hour chart shows something is happening with AMZN, Jeff is a well respected CEO, but maybe this has something to do with the escalating fight over internet sales tax, that's going to hurt AMZN and valuations would need to be adjusted. Longer term we see accumulation in 2011 and for a long period, we see some distribution and a move higher, but that move higher saw no additional accumulation, at least not strong enough to make it to this chart and we see a deeper leading negative divergence suggesting strong distribution in to higher prices, new highs and demand.

What this chart tells me in essence is that AMZN was accumulated (the "Buy cheap" part) and the large accumulated position is under distribution in to higher prices (the "sell high " part), since there was no additional accumulation at a very nice pullback, this tells me that the focus is on getting out of AMZN of perhaps moving to a net short position, the divergence is worse, there was no accumulation of the deep pullback, this is a stock I want to be short longer term, thus the equity short with no leverage which allows me more room to withstand draw down and volatility and give the trade time to work.

I think we are still good on both positions and I'll be looking for the sell area for the calls and the Sell short area for the longer term.

Did A.P. leave some money on the table? Yes, but did he trade his plan? Yes and he was well rewarded. Like I said last night and often say, take what the market will give, but understand the limitations, understand the trade you planned.