Amazon shares are breaking long-term chart support and approaching a major inflection point

Amazon’s stock has tumbled enough in the past week to do real damage to its long-term chart — enough to warn investors that it could get a lot worse.

But amid market turmoil and concerns about how inflation and rapidly rising interest rates could hurt the e-commerce giant’s customer base in the coming months, there are also some technical signals that suggest the stock could be getting pretty close to a major deviation point.

First, the bad news. Amazon.com Inc.
AMZN,
+1.88%

shares have taken a historic beating since the middle of last week. For the fifth session in a row, shares erased an early intraday gain of at least 1% to sink into the red.

On Friday, it rose as much as 3.5% in mid-morning before making a sharp reversal to trade down as much as 1.4% in afternoon trade, before another reversal sent it up 1.9% to $90.98 at close. That late rally fizzled seven-day losing streak in which it fell 25.95%which was its worst performance in any seven-day period since it lost 26.04% in the period ending November 19, 2008.

The sharp price weakness also comes amid negative fundamental developments, as the company reported last week disappointing third quarter earnings and negative outlook for the festive period and said it was hiring freeze for corporate jobs while monitoring the outlook for the economy.

John Kosar, chief market strategist at Asbury Research, said the stock broke below a key support level of $102.53 on the longer-term weekly charts.

An old Wall Street adage states that previous resistance, once broken, often becomes support. The stronger the resistance on the way up, the stronger the support on the way down.

The idea is that when investors sell a stock at a certain price and the stock subsequently rises above that price and then moves back down to that price, it becomes more likely that those same sellers will buy back that stock.

For Amazon, the support Kosar refers to comes from the five-year weekly bar chart, with each bar depicting the open, close and trading range for the week.

FactSet, MarketWatch

The $102.53 level marked resistance at the top for the week ending September 7, 2018, which was supported a month later when the stock hit a high of $101.66 before falling about 36% to the December 28 weekly low from $65.35. Resistance fended off another rally as shares hit $101.79 in July 2019.

Resistance finally gave way in February 2020 and, after an initial period of pullback, sparked a rally that lifted the stock to its record close in July 2021.

After the post-pandemic rally faded, previous resistance underwent two severe tests of support in May and June 2022, leading to a major bounce in August.

But the latest selloff proved too much for support to handle.

With key support broken, “this clears the way for a move down to $81.30,” Kosar said.

This is the low for the week ending March 20, 2020, amid uncertainty and fears over the COVID-19 pandemic, and the low of the pullback before the post-pandemic surge.

FactSet, MarketWatch

Now for the good news.

Adding to the importance of this support, an uptrend line that started at the January 2015 weekly low and connects to the January 2016 low extends to just above $81.

The convergence of two different support types probably makes this level an even stronger support zone than if they were separate.

A third point of the chart may be charm. The key 61.8% Fibonacci retracement of the uptrend rising from the January 2016 weekly low to the July 2021 all-time weekly high comes at about the same level.

FactSet, MarketWatch

This correction level is based on the mathematical Fibonacci ratio of 1.618, also known as the golden ratio, given its prevalence in natural systems. a lot Followers of Fibonacci on Wall Street believe that the 61.8% retracement can act as an important chart level because if it breaks, it suggests that the previous trend is no longer intact. Read more about the importance of the Fibonacci ratio in chart analysis.

Fibo levels are not necessarily areas of natural support, but they can act as benchmarks that, in times of heightened uncertainty, can provide comfort to investors. And the more points on the chart break out at such a level, the more visible they become to potential buyers – especially, perhaps, when the charts show an upward technical divergence.

While Amazon’s stock price has been falling, making lower highs and lower lows, the Relative Strength Index (RSI) has been rising over the past few months, making higher highs and lower lows.

FactSet, MarketWatch

The RSI is a basic momentum indicator that attempts to depict how the magnitude of recent declines compares to recent gains. When the RSI makes a higher bottom while prices are falling, it suggests that it is taking more and more energy from the bears to push prices down, and the bulls are gaining strength.

The bullish divergence seen on Amazon’s weekly chart would be classified as the strongest, or “Class A”, divergence as defined by CMT Aswithocation.

Technical differences are not good timing tools because they can go on for long periods of time before they are finally resolved. But they tend to be decided in the direction of the technical indicator.

And they can act as a warning not to sell into a bounce if and when one happens.

Amazon shares have tumbled 45.4% year to date, while the Nasdaq Composite index
comp,
+1.28%

has lost 33.0% and the S&P 500 index
SPX,
+1.36%

has decreased by 20.9%.

Source link

Leave a Reply

Your email address will not be published. Required fields are marked *