To fill or not to fill

02/06/20
  • AMZN jumped after last week’s earnings release
  • Stock formed a 6.9% price gap Wednesday to Thursday
  • Potential for pullback into gap?

When you’re a trillion-dollar company and your stock is trading above $2,000 share—and just hit a new record high—gapping nearly 7% higher may seem like just another day at the office.

Yes and no. Amazon’s (AMZN) surge last Thursday (January 31) after its big earnings beat left a 6.9% gap between Wednesday’s high and Thursday’s low, even though the stock dipped slightly into the gap on Monday. Around noon ET yesterday, AMZN shares were trading slightly in the red after pulling back from a new record high of $2,071.02:

Chart 1: Amazon (AMZN), 12/6/19–2/5/20. Gapped to new records.

Source: Power E*TRADE


The record shows last week’s up gap was a pretty rare event, even for AMZN: Since 1998, the stock has made only 21 other up gaps of 5% or more (and only 14 were bigger than last week’s), and the last one was back in October 2017.

Now, rather than go into the old “gaps were meant to be filled” trading maxim—that is, prices will reverse to “fill” a price gap before resuming their previous move—let’s just take a look at AMZN’s track record after its other big gaps.

And then we’ll look at what Jeff Bezos has been doing with his stock lately. Sit tight—more on that in a minute.

First, here’s the bottom line on AMZN’s post-gap price action: Yes, sometimes the stock filled the up gap, or a significant portion of it, relatively soon (i.e., within a month or so), but sometimes it kept rallying and never turned back. The following chart, which shows three 5%-plus up gaps from 2015, runs the gamut: The stock kept rallying for several weeks after the first one, pulled back roughly to the midpoint of the second one, and completely filled (and then some) the third one:

Chart 2: Amazon (AMZN), 11/24/14–12/8/15. Filling in the picture.

Source: Power E*TRADE


Crunching the numbers revealed a few interesting tendencies:

1. The stock pulled back at least to the midpoint of the gap within a month 13 of 21 times. (Only one gap has been completely filled in the past 10 years—the July 2015 example in the above chart.)

2. After four days, AMZN was trading higher (that is, above the gap bar’s closing price) 14 of 21 times, with an average gain of 1%. However, after 10 days the stock was higher in only nine times and the average return had shrunk to only 0.33%, which suggests that in some cases the stock tended to pull back four to 10 days after a big up gap.1

Finally, according to SEC filings, Amazon founder Jeff Bezos sold around $1.8 billion worth of AMZN shares on Friday and Monday. That in and of itself isn’t significant—Bezos reportedly sells around a billion dollars of stock every year to fund his space exploration company2 (must be nice, huh?).

There are all kinds of restrictions regarding insider sales of company stock, but regardless, it’s fun to ponder whether Mr. Bezos tries to cash in when he thinks the stock is at a relatively high level.

Patient bulls who don’t want to chase a red-hot stock may be watching that gap in the weeks to come.

Today’s numbers (all times ET): Challenger Job-Cut Report (7:30 a.m.), Productivity and Costs (8:30 a.m.), EIA Natural Gas Report (10:30 a.m.).

Today’s earnings include: Dunkin' Brands (DNKN), Bristol-Myers Squibb (BMY), Baidu (BIDU), Yum! Brands (YUM), Kellogg (K), Estee Lauder (EL), Tyson Foods (TSN), Penn National Gaming (PENN), Uber (UBER), Pinterest (PINS), Twitter (TWTR), Philip Morris (PM), IQIYI (IQ).

 

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1 Reflects 5% or larger one-day price gaps in AMZN, 4/28/98–1/31/20. Supporting document available upon request.

2 BizJournals.com. Jeff Bezos sold nearly $2B worth of Amazon shares in two days. 2/4/20.

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