AMZN Stock: Chart Damage
Amazon.com, Inc. (NASDAQ:AMZN) stock opened 4.5% lower the morning after a disappointing earnings quarter was announced.
Amazon missed its earnings estimates, reporting earnings of $0.52 per share in the third quarter, while expectations were for $0.78 per share. This news of an earnings miss left a gap on the AMZN stock chart. This gap has done some damage to the price chart and increases the likelihood that further bearish price action will continue.
The method I use to analyze potential investments is based on their price charts. I am a believer that stocks trend, and as a result, past data can be used to discern trends and forecast future prices. The body of knowledge behind my analysis is known as technical analysis, and new developments in behavioral finance support this style of investment analysis.
I was previously bullish on Amazon stock, but that has changed after the earnings miss that caused the share price to gap lower. This price gap has done damage to the technical picture, and this opens the door to lower share prices, as that is now the path of least resistance. Throw in the uncertainty with regards to the presidential election and the possibility of a rate hike, and the perfect storm to drive the share price lower is created.
The Amazon stock chart below illustrates the chart damage that was caused after the company’s earnings were released.
Chart courtesy of StockCharts.com
AMZN stock opened lower on October 28, 2016 and left a gap on the price chart. This gap has Amazon stock trading below the 50-day moving average. This moving average has been a level of support for AMZN stock in 2016, as any attempt to breach this level was met with buying support.
The previous break of this moving average occurred on the first trading day of 2016, and Amazon stock proceeded to sell off dramatically in the weeks that followed. Amazon stock fell from $655.00 to $475.00, and this represented a 27.5% drop after the 50-day moving average was breached. Similar bearish price action can now be expected.
There has yet to be any follow-through with regards to the gap down, so I expect AMZN stock to test the 50-day moving average from underneath. If it fails to close above this level, then I would be looking for levels of support as potential downside targets.
The following Amazon stock chart illustrates the levels of support that traders will be watching.
Chart courtesy of StockCharts.com
I focused on the three different methods of finding support, and to my dismay, all three levels converge at one price.
The first level of support is found using a horizontal trend line, and the line is created by using the previous peak. This price level acted as a level of resistance in 2015, and now this level is expected to act as a level of support when it is tested from above. It is not uncommon for a price to return to a previous level of resistance from above and to test it to reaffirm that the previous breakout was warranted. This trend line sits at $690.00.
The second level of support is found using the 200-day moving average. This moving average is the dividing line between stocks trading in a bull market versus stocks trading in a bear market. When the share price is above the moving average, it is bullish. When the share price is below the moving average, it is bearish. In bull markets, it is common for a share price to find support from the moving average when it is being tested from above. This moving average is currently sitting at $690.00.
The third level of support is found using an uptrend line. This trend line is created by connecting the valleys on the price chart. This line has served to support AMZN stock since shares bottomed in 2015. This line represents the bullish trend in Amazon stock; a break below this line would be cause for concern, as it would allude to further selling. The uptrend currently sits at $690.00.
All three of these levels of support are currently converging at one price. I would expect this level to hold on the first attempt at a minimum. Beyond that will be dependent on the status of the equity markets.
The Bottom Line on Amazon Stock
The events surrounding the earnings report have been the catalyst to change my views on Amazon stock. I am now bearish on this position and believe that lower prices will prevail. The $690.00 price appears to be the first level of support, and that is the level I will be watching to possibly act on. If AMZN stock can regain the 50-day moving average on a weekly closing basis, then I will have reason to retract my bearish view.
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