It was only a few short weeks ago that technicians were talking about a bearish head-and-shoulders top on the Amazon.com Inc. (AMZN) weekly chart. That technical dynamic has shifted, however, and indications on the daily chart now suggest the stock is headed toward new highs. Let's take a look at the chart to see how this transition came about and how traders can profit from the new bullish scenario.
It should not be surprising that an initial technical opinion could change. Price action is fluid and often one pattern will morph into another, sending mixed signals. That is why confirmation, in the way of follow-through supporting price action, is a requirement in technical trading.
The neckline or support line of the head-and-shoulders pattern on the weekly chart was located in the $930 price range. It was never broken, and the bearish reversal signal was never triggered. Instead what happened was the right shoulder of the head-and-shoulders pattern redefined itself into what now appears to be a "W" shaped consolidation pattern. The $1,000 level is the resistance level of this consolidation pattern and it is being tested in Thursday's session.
As this transition was underway, the technical indicators had time to realign. Moving average convergence/divergence has been making higher lows in bullish divergence to the stock price, and is now crossing above its center line. This is a sign of short-term positive price and trend direction. Chaikin money flow is flat but the Chaikin oscillator, an average of the 3-day and 10-day Chaikin money flow indicator, has crossed above its center line.
Amazon shares have underperformed the Technology Select Sector SPDR Fund (XLK) by 8% over the last year. It may be time for them to catch-up. The stock is a buy after another upper candle close above $1,000, using a trailing percentage stop. The "W" channel pattern projects a price objective measured by taking the height of the channel and adding it to the breakout level. This targets the $1,060-area. If that goal is achieved, the gravitational lure of new all-time highs, only a short distance away, should take over.
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