AMZN Stock: The Aging Bull
In my previous report, I outlined that bearish headwinds have begun to develop around Amazon stock, and that the catalyst that triggered these headwinds was an earnings report that disappointed investors. These investors showed their disappointment by selling AMZN stock. This selling pressure damaged the bullish trend in Amazon stock. The damaged trend suggested that lower prices were set to prevail. At the time I identified these bearish headwinds, Amazon stock was trading at $789.82, and presently, the stock is trading at $759.36.
I had pointed out that although bearish headwinds were swirling, Amazon stock had substantial price support at $690.00, and it was unlikely that support would break on the first attempt. AMZN stock never got to $690.00, but it did drop to $710.10 before a rally ensued.
I still have my concerns surrounding Amazon stock. The same bearish headwinds are still swirling, and they are becoming more visible in terms of relative weakness. This relative weakness can be seen as Amazon stock has failed to gain traction, even when major market indices soared to new all-time highs on the news that Donald Trump was set to be the next President of the United States.
After the election, and in the days following, interest rates rose violently as bonds sold off. Even though this is big news, it has been overshadowed by the performance of the stock market. Growth stocks perform poorly in a rising rate environment, and that is why AMZN stock and other growth stocks have failed to follow suit. Money mangers responded to higher interest rates by rotating out of growth stocks and into sectors that flourish in a rising rate environment like cyclicals and financials.
The trend in AMZN stock is cracked, but not broken, and the longer-term trend remains higher. The future of Amazon stock will depend on how it will react when it tests previous levels of support and new levels of resistance.
The following AMZN stock chart illustrates that a previous level of support is now acting as resistance.
Chart courtesy of StockCharts.com
The 50-day moving average has acted as a major level of support and resistance for Amazon stock. When Amazon stock is trading above, it the trend is bullish and the path of least resistance is higher. When it is below it, the trend is bearish and the path of least resistance is lower.
AMZN stock broke above the 50-day moving average in March 2016 and the stock proceeded to trend higher. Each and every time AMZN stock hit this moving average from above, it provided price support and the bullish trend continued.
Amazon stock finally broke below this moving average after a disappointing earnings report in October 2016, and it has failed to trade above it ever since. As of late, this moving average is acting like resistance and is rejecting the price from advancing beyond it. This moving average is beginning to slope downwards, and this will add further pressure as resistance starts to appear at lower prices.
In order for me to support a bullish bias on AMZN stock, the price will need to close above this moving average.
The following Amazon stock chart illustrates the major levels of support that have contained all price weakness.
Chart courtesy of StockCharts.com
The Amazon stock chart above illustrates three major levels of support. They are all listed below in the order they appear.
The first 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 $716.09, and the slope is positive so support continues to rise
The second 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 $710.00, and it also has a positive slope, so as time progresses, support continues to rise.
The third level of support is found using a horizontal trend line. This trend line was created by using the previous peak that acted as level of resistance in 2015. When a previous level of resistance is broken, it is not uncommon for the price to return to this level from above to ratify that resistance is indeed broken. This price action occurred in May and June 2016. Horizontal resistance currently sits at $690.00, and this level does not change.
AMZN stock remains above all three levels of support, but I believe the most important level is the uptrend line. As long as AMZN stock remains above this level, the bull market is intact and the current sell-off is nothing more than a correction in a bull market.
If the price falls below the uptrend line, it would signal that a larger correction is in play, and that perhaps a bear market has gripped Amazon stock.
Bottom Line on AMZN Stock
The long-term trend in Amazon stock remains bullish, but as long as AMZN stock is trading below the 50-day moving average, I will refrain from holding a bullish view.