Amazon (AMZN) shares dropped after the cloud giant offered a disappointing forecast on both the top and bottom lines during its earnings call in early August. While the stock has since recovered much of its decline, it appears to be facing significant resistance around the $180 price level. This leads to an intriguing trade set-up known as the "gap-fill-rejection trade.
" When a stock experiences an exaggerated drop in price — often following earnings announcements, major analyst rating changes, or top management shakeups — it creates a price gap. It's a widely recognized phenomenon that these gaps tend to fill over time. However, when gaps are caused by fundamental reasons, the previous closing price often becomes a strong resistance level, adding to the complexity and appeal of this trade setup.
In the case of AMZN, the gap occurred near the $180 price level. As shown in the six-month chart below, AMZN is encountering resistance at this level, and the stock is struggling to break through. Additionally, the relative strength index (RSI) is indicating a downtrend, further suggesting that the "relief rally" in AMZN may be losing momentum.
The trade With AMZN trading at $175 at the time of writing, I am considering opening a bear put spread by buying a 180 strike put option and simultaneously selling a 175 strike put. This setup is known as a "bear put spread," or a "put debit spread," since it is established for a net debit. If AMZN catches a bid and trades around $177, the.