Most Investors Will Miss This Powerful Buy Signal on Amazon's Chart

Amazon.com (NASDAQ: AMZN) may have disappointed shareholders Friday with another earnings miss, but all I see is opportunity.

At this very moment, there is a screaming post-earnings buy signal on the charts that has worked out 100% of the time over the past two years. This signal is not something most investors would spot, but I use it frequently -- and with great success.

It doesn't hurt that I'm intimate with Amazon's chart patterns, statistics and earnings trends. Our last technical trade in AMZN (although not an earnings-related trade) netted us 51% in less than two months. This time, I see an opportunity for 65% gains before year end.

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AMZN sold off to the tune off 8% Friday following its third-quarter earnings release after the close on Thursday. If investors were truly running for the hills, though, we would have seen a much more violent move and the rally from the pre-market prices would have been absent. ?CEO Jeff Bezos has been very clear with investors and the media that he is focused on the bigger picture rather than quarterly results. Back in 1997, he informed them that he would be spending money to expand Amazon's empire, and from time to time, the company would incur losses as it grew.

While Amazon may be missing on the bottom line, its customer base and revenues are growing. Like Bezos, I see the bigger bullish picture for AMZN. But what's more important today is the chart action.

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Trading Amazon's Earnings Reversal

Trading earnings is one of my specialties. As an options trader, I focused heavily on the action leading up to an earnings announcement. I gauged bullish or bearish sentiment and estimated how big of a move a stock would make once the report was out.

Most of the time, I would enter a trade ahead of the report and exit almost immediately after earnings were released.

As the years of successful pre-earnings trades went by, I began to notice a large number of stocks that performed what I call an "earnings reversal."

When a stock is trending (either bullish or bearish), its earnings report can accelerate it in the direction of the trend. An earnings reversal occurs when shares move outside of their Bollinger Bands, creating an overbought or oversold condition from which the stock then reverses.

Essentially, the reaction to earnings pushes the stock too far in one direction, and if the conditions are right, a short-term reversal occurs and thrusts the stock in the opposite direction, often in a big way.

In the case of Amazon, this powerful signal was triggered after seven of the past eight earnings reports. In each instance, if a trader went long or short (depending on the nature of the signal) at the close the day following the announcement, they would have made an average of 11.4% before the next report was issued.

The most dramatic earnings reversal came in April 2013. AMZN was in a bearish trend when it gapped lower following its report. Traders who entered a bullish position at the close on April 26, 2013, made 21% in just three months.

The signal I'm seeing right now looks just as strong as the one I spotted then.

AMZN closed Friday at $287.06. Simply moving back to its pre-earnings close of $313.18 would only require a 9% gain, less than the 11% average move the stock has made after every signal in the past two years.

With a call option strategy, we can leverage that 9% gain into 65% profits in two months.

AMZN Call Option Trade

Today, I am interested in buying AMZN Dec 270 Calls for a limit price of $26.

Risk graph courtesy of tradeMONSTER

This call option has a delta of 72, which means it will move roughly $0.72 for every dollar that AMZN moves, but it costs a fraction of the price of the stock.

The trade breaks even at $296 ($270 strike price plus $26 options premium), which is 3% above current prices.

If AMZN hits my upside target of $313, then the call options will be worth at least $43. Once you enter the trade, place a good 'til cancelled (GTC) order to sell your calls at that price.

Recommended Trade Setup:

-- Buy AMZN Dec 270 Calls at $26 or less (use limit orders)

-- Set stop-loss at $13

-- Set price target at $43 for a potential 65% gain in two months