Will Amazon (AMZN) Earnings Follow the Trend?

After trending downward for the majority of the quarter, shares of Amazon.com, Inc. (AMZN) have perked up ahead of the company's fiscal fourth quarter earnings results. Following the wider tech sector sell-off to start 2022, Amazon shares trended into an extreme low range based on historical volatility but have recently turned toward the upside in the past week. Analysts expect the retail giant to announce $3.54 in earnings per share (EPS) and $137.63 billion in revenue. After the company missed expectations for the prior quarter and offered lower guidance, investors will be looking to see how Amazon has managed macro factors affecting its bottom line.

Despite not being a pure play technology stock, Amazon has seemingly followed the technology sector's sharp pullback from pandemic-era highs. Amazon shares have shed 11.2% since the start of 2022, a larger loss than both the S&P 500 Index and Nasdaq Index. This could be in part because of Amazon belonging to the consumer discretionary sector, which has been one of the worst performing sectors recently as inflation-based sector rotation has gained momentum.

Ahead of earnings, option traders appear to be positioning themselves for the Amaozn share price to fall. That's because the open interest features a higher number of put options than calls, and implied volatility suggests that traders are selling the upside calls while buying the downside puts.

Nearly all of the "big name" mega stocks have experienced downturns to start 2022. However, several have had pronounced upside share price activity after reporting earnings. It should be noted that both the Apple Inc.(AAPL) and Microsoft Corporation (MSFT) share prices rebounded to the upside after option traders were similarly positioned ahead of their earnings reports.

Price Action

A comparison between technical analysis of share price movement and recent option trading activity can grant chart watchers valuable insight into the overall sentiment toward Amazon stock ahead of the earnings announcement. The chart below illustrates the recent price action for the Amazon share price as of Tuesday, Feb. 1.

The chart illustrates how Amazon shares have been on a steady decline after the company reported earnings for the last quarter and have faced resistance at the 20-day moving average, represented by the middle line of the purple bands. The share price fell to an extreme low of the volatility range in late January, before recovering a bit to the upside ahead of earnings.

The purple bands on this chart are an extreme historical volatility range formed by 4 standard deviations of 20-day Keltner Channel indicators, which depict price levels that represent a multiple of the average true range (ATR). ATR is a standard tool for illustrating historical volatility over time. These bands could be considered to represent the extreme ranges of option pricing. 

It's notable that these bands briefly narrowed in early January and appear to be widening as earnings approaches. This could mean that option pricing is growing ahead of the Amazon earnings announcement, which could translate into investor uncertainty regarding the report.

The Amazon share price could be facing macro headwinds at the moment. Investors appear to be fleeing the consumer discretionary sector in preparation for an increase of interest rates and a shift into the next phase of the economic cycle.

The chart above compares the recent performance of Amazon with its sector, represented by State Street's Consumer Discretionary Sector ETF (XLY), and the market at large, represented by State Street's S&P 500 Index ETF (SPY) and Invesco's Nasdaq-100 ETF (QQQ). This chart highlights how Amazon has lagged the market at large and its sector.

Also on the chart is State Street's Consumer Staples Sector ETF (XLP) and Technology Sector ETF (XLK). Amazon is frequently lumped in with the mega-cap technology stocks that comprise a large percentage of the holdings of XLK, generally known as FAANG stocks. While Amazon is perhaps best known for providing consumer goods as an online retailer, a large portion of its business comes from its internet hosting services known as Amazon Web Services. So, it is worthwhile for a comparison.

The consumer staples sector, represented on this chart by XLP, could be considered useful to compare to Amazon's sector, consumer discretionary. Stocks in the XLP sector tend to be slow, consistent growers that tend to provide solid dividends. XLP is a sector that is considered a safe sector during times of inflation in contrast to XLY, which tends to shrink during times of inflation.

This contrast between XLY and XLP can be considered a "wants vs. needs" comparison, as consumers tend to spend more on essential needs during times of inflation than desires. Chart watchers should recognize that, over the time frame on this chart, XLP has outperformed not only XLY, but the market at large.

Volume Profile and Options Outlook

Comparing price action and option trading can provide chart watchers insight into the sentiment traders and investors hold toward a company's future performance. However, further context of price action in terms of volume could illustrate areas of support and resistance, which could provide additional context to option open interest. The chart below illustrates the recent price action of Amazon, in addition to a price-based volume pattern on the left side.

This price-based volume pattern depicts the prices where investors have bought and sold the shares previously. A noticeable amount of buying in the past often implies that investors will feel the desire to defend their positions at those same prices by buying more shares or at least not selling any further. When volumes at a given price are low or nonexistent, it implies that few, if any, investors have the need to defend their positions at these levels.

The Amazon share price has recently risen toward a thin zone of volume that is heavy on selling, highlighted by the red rectangle. This zone could prove to be an area of upside resistance if Amazon were to have a favorable earnings report.

Option traders appear to be positioning themselves for downside share movement in the near term. While recent trading volumes favor calls over puts 76,000 to 57,000, the open interest features 372,000 calls compared to 393,000 puts. These numbers give a conflicting sentiment toward Amazon, but further analysis illuminates additional details.

For Feb. 4, the next weekly option expiration date, it appears that option traders are selling out-of-the-money calls while buying out-of-the-money puts. Implied volatility for upside calls is falling while the open interest is rising, suggesting that option traders are taking short positions in these options. Similarly, implied volatility for downside puts is rising as the open interest is rising, indicating that traders are buying these options.

Wrapping Up

The Amazon share price has risen from an extreme low range toward the 20-day moving average ahead of earnings. Option traders appear to be selling upside calls and buying downside puts, implying bearish sentiment.  If these bets were to unwind in a post-earnings share price reaction similar to that of Apple and Microsoft, it could place unexpected upward pressure on the Amazon share price.