Amazon is going ‘dramatically lower’: Technician

It's been a tough 2014 for Amazon. Shares of the online retailer have badly underperformed both the S&P 500 and the retailer group this year and have fallen 19 percent.

It is worth remembering, of course, that the stock is still up nearly 700 percent over the last 10 years. But for some technicians and options traders, the recent weakness indicates that much more downside is ahead for the online retail giant.

"Something's not right, and we think it goes lower," said Carter Worth, chief market technician at Sterne Agee, on CNBC's "Options Action" on Friday.

The chart analyst points out that "Amazon is not keeping up with retailers in general, and there have been some big moves in 'dead' names of late," noting massive two-month rallies in stocks such as American Eagle, Family Dollar and Kohl's.

In fact, while the trend over the past five years has been that Amazon has led retailers, which have led the market, that trend flipped completely in 2014.

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So where will Amazon shares go next?

Worth examined a five-year chart of Amazon, which he says has reached a critical juncture.

"This is perfect equilibrium," he said. "After a great ascent, a stock starts to have a series of lower highs, higher lows, and you work into this apex of a wedge, a triangle. And it means that you've come to a point where the debate is going to end—the bears either win or the bulls win."

"We're on the bear camp here," Worth added, examining a two-year chart of Amazon to explain why.

Worth shows several points at which Amazon shares gapped down on heavy volume, which he takes to be a bad sign.

"We think, ultimately, it breaks the trend right here and we fall quite dramatically," he said. "We would not be long Amazon, and if you're looking for a short sale, we think it's a good one."

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Mike Khouw of DASH Financial says that the fundamental side of the story also calls for getting bearish on Amazon.

"They haven't demonstrated that they can actually make any real margins. All of the investment in the stock has basically been a strategic bet that [CEO Jeff] Bezos' play on growth was the way to go here," Khouw said.

"This has been one of the reasons it's been so hard to short this thing, because you can't really distinguish when people are going to stop making those kind of bets until you start to see it break down technically. And that's what Carter has basically illustrated for us," the options trader concluded.

So to make a defined-risk wager that the stock will go lower, Khouw recommends buying the January 315-strike put for $16. This trade will make money if Amazon shares are below $299 at January expiration.

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Host Bio

  • Melissa Lee

    Melissa Lee is the host of CNBC's “Fast Money” and “Options Action.”

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