Can Amazon Continue to Deliver -- or Is It Primed for a Pullback?
Amazon (AMZN) - Get Report is up over 50% from just its February lows, accelerating higher this month and altering its angle of assent on a potentially unsustainable trajectory.
The base from which the climb began can be seen on the daily chart daily as an inverse head and shoulders formation, with the January low acting as the left shoulder, the February low as the head of the pattern and the complex right shoulder forming in March. Neckline resistance in the $580 area is also a 50% Fibonacci retracement of the 2015 high and this year's low. The height of the formation reflects a 23% gain in the stock price and projected a price target back up to the December high.
After breaking above the intersection of the 50- and 200-day moving averages in March, the stock went on to take out neckline resistance. A second 23% advance achieved the price target, and last week Amazon continued to deliver, taking out and closing above the old highs. This latest price action may have achieved a temporary apex as the stock is becoming overbought and technical indications suggest fatigue.
A close look at the price action at the end of last week reveals an interesting series of candles, not quite a bearish eveningstar reversal pattern but exhibiting similar qualities. On Wednesday a small white candle formed, followed by a narrow opening and closing range "doji" candle on Thursday and finally a dark or down candle in the final session. These consecutive candles represent a transition from bullishness to bearishness, and forming just after new highs adds to their negative character.
Chaikin money flow dropped off significantly over the last month, and the relative strength index has entered an overbought condition. The graph at the bottom of the chart shows how far price has deviated from its 50-day moving average, and currently it is 12.5% higher than the average and the highest it's been since late last year. The combination of this severely overbought condition and deteriorating positive money flow suggests that the stock is ready either to re-enter another period of consolidation or to retrace some of its recent gains.
The integrity of the $692 level should determine the short-to-intermediate term direction of the stock price. If it holds, this would be a base for consolidation, and if it fails, it would be the start of a reversion back to the 50-day moving average.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.
