The two charts that show why Amazon shares could keep sliding

It's been a rough few session for one of America's hottest stocks, and one technical analyst predicts that more downside is ahead.

After reporting earnings on Thursday evening that badly missed profits expectations, the online retailer and web services provider saw its shares slide for two straight sessions, closing Monday trading nearly 9 percent below the record levels achieved during the middle of the day on Thursday.

A bit of respite came Tuesday, when the stock rose nearly 1 percent to close at $996.19. But to those who are eager to buy a stock that is still up 33 percent this year, Evercore ISI technical analyst Rich Ross would advise that it's too early to bite.

The recent drop is "a classic sign of trend exhaustion," Ross said Tuesday on CNBC's "Power Lunch." "That sets us up for a test of that classic support at the $950 level. So I see another 5 percent of downside of Amazon."

On a longer-term chart, it becomes even more clear that the stock has seen an "exhaustive bearish reversal" which "sets us up for some short-term weakness," Ross said.

"Worst-case scenario, I think you're buying the stock down around $900. But at $950, we become extremely interested," Ross said, adding, "I'm not buying it here, today."

Meanwhile, in the options market, sentiment remains bullish. Investors are continuing to pay a premium for call options, which become more valuable as the stock rises, according to Dennis Davitt, a portfolio manager at Harvest Volatility Management.

From a fundamental perspective, Davitt points out that the company is continuing to show sales growth, even beating revenue expectations in its recent report. Profits, then, are not necessarily a huge concern.

"So long as they keep growing the top line, no one cares," Davitt wrote to CNBC on Wednesday. "If you were an analyst in this sector for the past 10 years and applied conventional thinking to this stock, you lost your investor a good amount of money."

Disclosure: Dennis Davitt has no position in Amazon.


Trades to Watch

Trader Bios


Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

Read more