The Caution Flag Has Been Raised on Amazon Stock

AMZN Stock
Credit:iStock.com/grapestock

AMZN Stock: Reasons for Concern

The market darling Amazon.com, Inc. (NASDAQ: AMZN) stock has attained an extraordinary feat by forging a high over the $1,000 mark. The actual price has little meaning, but the journey to get there that has been quite the accomplishment. Once upon a time in the year 1997, AMZN stock traded as low as $1.31, and over a span of 20 years, Amazon stock has appreciated to the tune of 82,595.42% after hitting a high at $1,083.31. It took a journey to reach these heights, and along the way there were a number of indications and price patterns that signaled that further gains were likely to continue.

These indications and price patterns—or tools, as I call them—are all within the context of technical analysis, which is a method of analysis I employ in order to generate a bullish or bearish view on an investment. This method of investment analysis is based on the notion that historical data points can be used to speculate on what the future may bring.

These tools are why I am focusing on AMZN stock once again, because a number of indications are suggesting that a correction in the stock price is now in development. As a result, I am raising the caution flag on this investment.

The following Amazon stock chart illustrates the indications that have swung into bearish alignment, suggesting that a correction is now in development.

Amazon stock chart

Chart courtesy of StockCharts.com

The indications suggesting that a correction is now in development are a break below an influential uptrend line and a bearish moving average convergence/divergence (MACD) cross.

The uptrend line is a simple tool that is created by connecting the lows on a stock chart. The uptrend line defines the bullish trend and also serves as an important level of price support. This uptrend line was established in January 2015, and every time it was tested, buyers were eager to step in and support the Amazon stock price.

Also Read10 Reasons to Be Bullish on Amazon Stock

I have highlighted this uptrend line in many reports, outlining its importance. I have always stated that as long as the stock price is trading above this uptrend line, that bullish trend towards higher stock prices is intact and likely to continue. So when AMZN stock fell below this uptrend line in August of this year, it was suggesting that the bullish trend towards higher stock prices had concluded, and that a larger correction was now set to ensue.

The bearish view is being supported by the MACD indicator. MACD is a momentum indicator that distinguishes between bullish and bearish momentum. In order to stage an advance, bullish momentum is needed. In order to stage a decline, bearish momentum is needed. The distinction between these two polar opposites is made by using the crossing of a signal line.

A bearish MACD cross was generated in July of this year, indicating that bearish momentum was now influencing the stock price, which paved the path of least resistance geared towards lower prices. While this indicator is in bearish alignment, I can only assume that lower prices are on the horizon, because previous bearish crosses have provided similar results.

AMZN stock is a bellwether stock, so the repercussions of a correction may be widespread. The time to be nimble is here, and reducing risk is only logical.

All is not completely lost, because there are still a few metrics that are still in bullish alignment, and they might provide price support when that metric is met.

An influential level of price support is obtained using the 200-day moving average, and it is illustrated on the following Amazon stock chart.

Amazon price chart

Chart courtesy of StockCharts.com

The 200-day moving average is highlighted on the AMZN stock chart above. This metric is created by averaging the closing price over the last 200 days and plotting that value on the stock chart. This influential moving average is a very popular metric and it is used to gauge the health of an investment. In essence, this moving average acts as a dividing line; an investment trading above it is labeled as healthy, and one trading below it is labeled as unhealthy.

It is not uncommon for the 200-day moving average to act as a level of price support, and that is exactly what I am expecting to occur. Whether or not this level will hold is something to be seen, but given the bearish indications that have been generated on the Amazon stock chart, I strongly believe that this metric is going to be tested in the not too distant future.

Analyst Take: 

A number of metrics that have supported the advance in Amazon stock have swung into bearish alignment and are suggesting that a correction is in development. I do not take the magnitude of these indications lightly, and it is why I am raising the caution flag on AMZN stock.