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Amazon’s charts are troubling ahead of earnings: Technician

Amazon's amazing run may have come to an end, according to one technician.

After surging more than 35 percent in the first seven months of the year, shares of the e-commerce giant have been trending lower, underperforming both the broader markets and its FANG counterparts.

"Much of the broader indices are breaking through the summer 2017 highs, whereas Amazon is clearly off the high," Todd Gordon of TradingAnalysis.com said Tuesday on CNBC's "Trading Nation." Amazon hit a record high in July but has since fallen more than 9 percent, putting it in correction territory. Meanwhile, Facebook, Alphabet and Netflix hit new highs last week.

Gordon cautioned that as the tech giant gears up to report earnings on Thursday, a classic head-and-shoulders pattern has formed on the chart, and any move lower puts the stock in jeopardy of breaching key support.

"It appears that we might try to challenge what they call the neckline [of this pattern]. If it breaks through here, it's quite bearish," he said. A head-and-shoulders top refers to when a stock makes a high, rallies to a higher high and declines back to the lower high.

Gordon added that the options market is implying about a $40, or 4 percent, move in either direction. If the stock moves lower on its earnings report, "that will take you through the support [level]," he said.

"What I like to do heading into earnings is rather than buy puts — which are expensive as implied volatility [or the price of options] gets quickly elevated … let's go ahead and sell [a call spread]," Gordon explained.

Specifically, Gordon sold the October weekly 1,000/1,005 call spread for a $1.30 credit. In this trade, Gordon sees profits if Amazon shares stay below $1,001.30 by Friday. Above that, losses kick in, but they are limited to the distance between the strike that he sold and the strike he bought, minus the cost of the trade.

"This is an earnings trade so you need to commit to the risk overnight. When the earnings report comes out, there's nothing you can do to hedge in the options market, so position size accordingly," Gordon warned.

Analysts polled by FactSet are expecting Amazon to report earnings of 2 cents per share on $41.6 billion of revenue.

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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.

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Brian Sullivan is co-anchor of CNBC's "Power Lunch" (M-F,1PM-3PM ET), one of the network's longest running programs, as well as the host of the daily investing program "Trading Nation." He is also a frequent guest on MSNBC's "Morning Joe" and other NBC properties.

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