Make no mistake, Amazon has enjoyed a very strong year in 2017, charging more than 26% higher since the calendar flipped to January. Just for a little context, that's about triple the price performance found in the rest of the S&P 500 year to date. Likewise, Amazon continues to dominate the retail sector, and it's consolidating that power with its high-profile purchase of Whole Foods Market Inc.
The marriage with Whole Foods was just made official today -- the $13.6 billion all-cash deal closed Tuesday morning, handing a nearly 20% premium to Whole Foods shareholders who owned the stock before the announcement.
But there's trouble in retail paradise.
Despite the successes Amazon has scored in 2017, shares are teetering on the verge of a colossal breakdown this summer. It's a price setup that could unwind a big chunk of the aforementioned gains in this popular tech stock. So, to figure out how to trade the latest development in Amazon's price action, we're turning to the chart for a technical look:
For most of 2017, Amazon has been bouncing its way higher in a well-defined uptrend. But that all changed earlier this month, when shares violated the trendline support level that had been acting like a price floor for shares. That trendline break isn't the red flag that's showing up in shares right now, but it facilitated it.
The bigger concern here is the fact that shares have been forming a pretty textbook example of a head-and-shoulders top since the start of the summer, a pattern that signals exhaustion among buyers. After the year-to-date solid run Amazon has enjoyed, it's not surprising that buyers might be feeling a little bit winded here.
And now, without that trendline support level to act like a floor for shares, the downside potential is elevated.
For Amazon, the breakdown level to watch comes in just above $925. Just to be clear, a violation of $925 isn't catastrophic for Amazon, it's just pretty bad. The minimum downside objective becomes $800 if Amazon fails to hold $925. That's a nearly 16% drop from where shares sit now.
Relative strength, the side-indicator down at the bottom of Amazon's chart, adds another caution flag to this price setup. While shares had been enjoying a relative strength uptrend since January, that line rolled over in the first week of August, and AMZN has been underperforming the broad market ever since. That means Amazon is predisposed to continue underperforming over the intermediate term.
Amazon might still be dominating retail right now, but its share price looks like it's about to be dominated by sellers in September.
Amazon slashes Whole Foods prices!
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.