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Amazon Primed for a Pullback

NEW YORK (RealMoney) -- Shares of Amazon (AMZN - Get Report) appear headed for a healthy pullback in the near term.

The stock has had an incredible rally since leaving behind a spike low in early October. Over the past nine weeks, AMZN shares have gained $100 while putting in four straight higher monthly highs. The most recent leg of the late November bull run attracted very light volume, indicating the move had become overextended. December's early action added more color to the topping process, with a failed upside gap as the month opened. AMZN fell again the next day, leaving behind a spike high just shy of $400. Downside trade increased during the two-day fade -- quite a reversal from the light-volume advance in late November.

The shares stabilized following early December's weakness but remain vulnerable to a deeper pullback. This would be a healthy event considering the stock's huge bull run since the end of summer. The rally has left layers of support in place. AMZN's initial layer of support rests near the $368.50 area. This is the stock's October high, and it was marked immediately following a stellar third-quarter sales figures. AMZN ramped more than 9% on the news, with help of the second heaviest upside trade of the year. It took the stock a month before this key level was cleared.

If AMZN were to retest this support level, it would need to complete an 8% pullback from the December high. This would cause minimal damage to the overall bull trend while supplying a much-needed rest. A short-term, light-volume base in the $368 area would be optimal, followed by a return of volume as shares begin to rebound.

For patient Amazon bulls, this type of near-term action would offer a low-risk entry.

--By Gary Morrow

At the time of publication, Morrow had no positions in the stocks mentioned.

Gary Morrow is president of Yosemite Asset Management, LLC, a registered investment advisory firm in San Luis Obispo, Calif. He manages individual accounts through Charles Schwab and runs a long/short hedge fund. Prior to forming Yosemite, Morrow spent 12 years on the floor of the Chicago Mercantile Exchange trading foreign currency and interest rate futures. He holds a bachelor's degree in economics from Ripon College.

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