AMZN Stock: Acting as a Market Gauge
The fed has raised rates a number of times this year, and their hawkish stance towards higher rates seems embedded. This creates a risk for the equity markets as a whole because equity markets do not like the notion of higher interest rates, because they never have. A hawkish tone means that fed is set on putting the brakes on the excessive liquidity they have created, and if history is a gauge, then a correction will soon follow. I am sure many have heard the saying “don’t fight the fed.”
Maybe this is the exception to the rule and this time is in indeed different? I cant say for sure, but what I do know is that I am using Amazon.com, Inc. (NASDAQ:AMZN) stock as my benchmark in order to determine if the equity market advance is still intact, or if a large correction is set to take shape. Amazon stock is a heavyweight which is currently sporting an impressive $468.0-billion market cap, and even more impressive is that AMZN stock is knocking on the $1,000 stock price marker.
These factors are nice, but what makes this investment my gauge is that it is currently trading above two important metrics that cannot be seen as anything but significant, and therefore as long as the stock price is trading above these metrics, I can only assume that higher stock prices are set to prevail. This notion translates into a healthy bull market in equities, as a whole, indicating that the bull market advance is set to continue.
The Following Amazon stock chart illustrates these metrics.
Chart courtesy of StockCharts.com
The AMZN stock chart contains two metrics that are currently supporting this investment. The first metric is an uptrend line, and the second is the 50-day moving average.
The uptrend line is a simple technical tool that is created by connecting the significant lows that have occurred over the years. This uptrend line has been in force since January 2015, when AMZN stock was trading at $285.00, and in less than three years this uptrend line has supported an advance where Amazon stock has appreciated to its current price of $988.86, which represents 246.97% over that time frame.
What sets this uptrend line apart from many others like it is the number of points of contact, which have especially been visible in this fiscal year. This uptrend line has been tested on four occasions in as little six months, and each and every time, buyers have stepped in to support this uptrend line. The notion that the repercussions suggested by this uptrend line are not significant is a difficult undertaking just based on the number of times this metric has supported the stock price from moving below it.
Reinforcing the uptrend line is the second metric, the 50-day moving average. This metric is created by averaging the stock’s closing price over the last 50 days and plotting that value on the stock chart. This moving average creates a gauge that measures whether an investment is in a healthy advance or that advance is slowing. On previous occasions when this moving average was broken to the downside, it meant that a larger correction was set to ensue, and that correction was always halted when the stock price tested the uptrend line.
At this moment, and for much of 2017, the 50-day moving average and the uptrend line have converged, providing one solid level of price support. This one solid level of price support is my line in the sand and is the gauge I will use to determine whether a larger correction is set to ensue in AMZN stock, and the entire market as a whole.
Using these metrics is actually really quite simple, and that these metrics currently coincide around one price only simplifies this process. As long as AMZN stock is trading north of the uptrend line and the 50-day moving average, I can only assume that the bull market advance in Amazon stock is intact, and therefore its assault on the $1,000 is set to continue because higher stock prices are on the horizon. This translates directly into the broader market, which presumes that the general equity bull market is also still intact.
If Amazon fails to remain above these coinciding metrics, I will have little recourse but to abandon my bullish view on AMZN shares and assume that a larger correction is set to ensue. This will cast a cloud on the entire market as a whole, suggesting that the equity markets are within the grips of a downdraft.
Interest rates are on the rise, and historically this has caused a headwind for equity markets. I am currently using Amazon as my market health gauge, and since I am currently bullish on Amazon stock, then I am bullish on the markets too. This bullish view is contingent on AMZN stock’s ability to remain above two coinciding metrics which are acting as a dividing line separating a healthy bull market from an unhealthy bearish one.