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Rule of Thumb Is to Buy Amazon on Every Dip

InvestorPlace - Stock Market News, Stock Advice & Trading Tips AMZN stock is rarely not one to buy. Even after this massive 2-year rally, the upside potential still outweighs the...

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This story originally appeared on InvestorPlace

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

Investorplace.com - InvestorPlace

Sentiment on Wall Street is now sour from the taste of two weeks of political headlines. There could be green shoots from the small-caps, as they have traded in a consistent range for months. One of those mega-caps might be telling a similar story. Amazon (NASDAQ:AMZN) stock is consolidating like the small-caps for a long while.

Logistics activity on the Amazon site of Vélizy-Villacoublay in France. Packages are sorted by workers on coneyors.
Source: Frederic Legrand - COMEO / Shutterstock.com

I contend that small-caps represent true investor risk appetite, so stock markets will recover. An index with 2000 stocks in it better represents “the market” than one with a few heavyweights.

AMZN stock has been trading in a consistent sideways range for months. Albeit it is a wide one, but that’s because this stock moves fast in both directions. This offers an opportunity to trade it up 13% potentially toward the upper end of that range.

And furthermore, with a bit of luck, they can even bust out of it. The truth is that AMZN stock is rarely not one to buy. Even after this massive multi-year rally, the upside potential still outweighs the downside risk.

Enough Support for Current Fear Levels

Amazon (AMZN) Stock Chart Showing Base for Another Rally
Source: Charts by TradingView

AMZN found support on Oct. 4 just as it had done on Aug. 20. In fact, the same happened at least twice two months earlier. Therefore, it is a fact that there are buyers lurking below current levels for it.

This will serve as a base for the rally to continue and challenge prior failure levels. It will need the help of the entire market because it cannot rally alone. The indices are in the process of finding footing as long as the headlines don’t worsen.

I expect that there will be resistance for AMZN stock near $3,450 per share. But if it can break out of $3,550, it can go another 5% and maybe even set new all-time highs. This is putting the horse before the cart, and the first levels of resistance are within 2% from current price.

Job one for the Amazon fans is to keep holding support. Otherwise, and if they lose this week’s lows, they risk accelerating the selling to $2,920 per share. In the event price falls from here, there are support zones below. But the bearish pattern could turn really ugly.

AMZN Stock Is Cheap

Now let’s discuss the value of this incredible stock. Management has executed on its plan flawlessly for over a decade. This team is beyond reproach and has earned the benefit of the doubt. It is an incredibly cheap stock in spite of its high ticket price. Total revenues doubled in three years. Net income grew 10 times in four years. These are incredible statistics yet the value metrics are still in check.

AMZN is the cheapest of the giga-caps from the price-to-sales (P/S) perspective. In fact, it is 40% lower than that of Apple (NASDAQ:AAPL). That suggests that owners of AMZN are realistic and humble with their expectations.

Some critics still judge it by its price-to-earnings, which is a complete mistake. This remains a growth stock, borderline startup company, so it overspends by design. Even so, and with a 56 price-to-earnings ratio, it is 25% cheaper than Nvidia (NASDAQ:NVDA).

In conclusion, I am confident that if the stock markets are higher in the future then so is Amazon stock. Shorting it as a long-term thesis means ignoring every fact there is. Its record speaks for itself and foretells of an upside opportunity that lies ahead. The odds of success of owning shares far outweigh the risks.

However, I am realistic that these macroeconomic conditions are unique. Therefore, we should expect surprises – and be ready for them. This includes not taking full-size positions all at once. It would also make sense to look into selling covered calls against stock in the portfolio when possible.

On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Nicolas Chahine is the managing director of SellSpreads.com.

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