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Mar 29, 2018

Investopedia | Amazon Stock Could Be Headed for Big Fall on March 29, 2018.

investopedia.com

Amazon Stock Could Be Headed for Big Fall

Alan Farley

Amazon.com, Inc. (AMZN) shares fell more than 9% on Tuesday and Wednesday, joining other FANG members in a volatile correction that could gather steam in the second quarter. Presidential tweets attacking the e-commerce giant's favorable tax status were blamed for the decline, but market players have been selling the entire tech sector aggressively, taking windfall profits following outsized first quarter gains.
Amazon stock rose nearly 40% between 2018's first trading day and mid-March's all-time high at $1,617.54, adding to 2017's impressive 56% gains. Taken together, the stock is now fully valued and in need of a long-term consolidation or decline to work off overbought technical readings and shake out complacent shareholders who believe that good investments never go down. Even so, major sell signals have been elusive in recent months and may require a shock event or adverse legislation to increase selling pressure. (See also: Trump Reportedly Wants to 'Go After' Amazon.)
AMZN Long-Term Chart (1997 – 2018)
The stock entered a powerful uptrend following the 1997 initial public offering, stalling in the low $80s at the start of 1999. It tested resistance twice into the new millennium and turned sharply lower, entering a downtrend that bottomed out in the single digits following the Sept. 11 attacks. A strong recovery wave into 2003 stalled at the 50% bear market retracement, yielding a shallow three-year decline, despite improved sentiment during the mid-decade bull market.
A 2007 buying impulse ended just below 1999 resistance, while a downtrend through the 2008 economic collapse found support well above the 2006 low, establishing supportive conditions for a strong bounce that completed a round trip into the 2007 high in October 2009. The stock broke out immediately, entering the most prolific period so far this century, and eased into a rising channel that broke to the upside in January 2018, setting off a vertical rally impulse that could signal a long-term climax.
Trading ranges and pullbacks have been scarce since 2008, with just three multi-month declines. A two-year consolidation between 2013 and 2015 marked the biggest setback for shareholders, while a quick plunge into the start of 2016 generated the most sleepless nights. Volatility has contracted sharply since the February 2016 low, with the stock not touching the 200-day exponential moving average (EMA) since November 2016. This marks an unsustainable technical condition that raises the odds for strong reversionary price action.
[Learn more about support and resistance levels in Chapter 3 of the Technical Analysis course on the Investopedia Academy]
AMZN Short-Term Chart (2016 – 2018)
The stock gapped down on Wednesday, closing below the 50-day EMA for the first time since October 2017. Price action around the gap should dictate the short-term technical tone, with aggressive sellers likely to return if the stock trades up to the $1,550 to $1,575 zone. A failure to remount the 50-day EMA at $1,460 would signal a more dangerous scenario in which momentum sellers could pile on in an attempt to break the stock's uptrend.
Price action since early 2016 has carved an Elliott five-wave advance, with a smaller-scale five-wave pattern embedded in the larger-scale fifth wave. This fractal could signal a long-term top, ahead of a steep correction that reaches the psychological $1,000 level and October 2017 continuation gap, centered at the 50% retracement level. Ominously for bulls, that would mark a 30% decline from Thursday's closing print.
The on-balance volume (OBV) indicator has tracked the stock's phenomenal performance, posting a long series of new highs into March 2018. Major selling pressure since that time has held above pattern support (blue line), a key level that concerned shareholders need to watch in the coming weeks because a breakdown could signal a volatile decline through February's deep low at $1,266. (For more, see: Why You Should Buy Apple, Dump Amazon and Facebook.)

The Bottom Line

Amazon stock is getting sold aggressively after hitting an all-time high and could enter a major correction that drops the market leader back to $1,000. (For additional reading, check out: Amazon Hiring Cleaners to Disrupt $16B Housekeeping Industry.)
<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>