Amazon (AMZN)  is at a critical technical juncture in both time and price and indications are that it should see at least a 10% pullback very soon, a move that has the potential to lead to even further deterioration in the stock price. Two charts outline the bearish scenario on longer and shorter time frames. The weekly chart highlights the rally that began at the $300 level in 2015 and has taken the stock price to over $1,000 a share.

A steady series of higher highs and higher lows has formed a rising triangle pattern, which the stock has been trading for the last three months. The latest attempt at a breakout has formed a bearish reversal pattern called an eveningstar, which often marks important tops in a rally.

An eveningstar pattern consists of a large white candle, followed by a small real-body doji candle, and is completed by a large dark candle. It represents a transition in investor sentiment from bullishness to bearishness, and this one has formed at an inflection point in the 45-period cycle the stock has been trading in since the start of the 2015 rally. This is confirmation in time as well as price action and suggests the stock is ready to shift direction.

The stochastics oscillator has moved out of an overbought condition and is tracking lower, below its center line, reflecting a loss in positive price momentum. Chaikin money flow is also moving lower and has crossed under its 21-period moving signal average. The price action that formed the eveningstar pattern on the weekly chart translates differently on the daily time frame, where another bearish pattern has developed.

A bearish flag pattern has been forming over the last two weeks, and has taken the stock price below the rising 50-day moving average, to test an uptrend line drawn off this year's lows. A move below the $980 level confirms a flag breakdown and projects a downside pattern price objective measured by taking the height of the flagpole and subtracting it from the breakdown level. In this case, it targets the $880 level, which is the current location of the 200-day moving average, and a 10% drop in the stock price.

Daily moving average convergence/divergence has made a bearish crossover and the Chandre Trend Meter, which assigns a numerical value to a stock based on several indicators over multiple time frames, is weak and tracking lower. These ratings reflect a loss in positive price momentum and trend strength.

The current test of the uptrend line at a cycle inflection point suggests a breakdown is imminent, and the stock price could quickly drop to test the 200-day moving average. A bounce would be expected at this point, but a subsequent break of this key technical average could see intermediate- to longer-term downside. Amazon is a speculative short-sale candidate after a break below the $980 level, using a trailing percentage buy-to-cover stop and an initial target price objective at the 200-day moving average.

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This article is commentary by an independent contributor. At the time of publication, the author had no positions in the stocks mentioned. 

 

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