Amazon.com, Inc. (AMZN) stock is flashing signs of technical deterioration that could signal a long-term top ahead of a deep correction that empties the pockets of short-term and long-term shareholders. Battle lines have been drawn at the 50-day exponential moving average (EMA) near $990 after the stock failed to hold that support level for the first time since October 2016. This bearish development follows a breakdown through the June high at $1,017 following July's poorly received earnings report.
The bullish fundamental outlook has not changed in the past few weeks, but broad benchmarks are now showing signs of rolling over and entering multi-month corrections following substantial post-election gains. In addition, this stock has risen too far too fast in 2017, gaining 44% into the July 27 all-time high at $1,083. It has lost more 125 points in the past two weeks in a vertical decline that has caught complacent longs by surprise. (See also: Why Amazon Is Losing to JD.com and Wal-Mart.)
The stock also faces growing political risk, with its colorful founder and CEO Jeff Bezos buying The Washington Post in 2013. An angry Trump administration has repeatedly attacked the newspaper and its owner for leaks and fake news, making Amazon an ideal whipping boy as it seeks to expand its food delivery business through the Whole Foods Market, Inc. (WFM) acquisition.
AMZN Weekly Chart (2010 – 2017)
Amazon stock cleared 11-year resistance at $113 in the second half of 2010 and entered a strong trend advance that held above support at the 50-week EMA into a 2014 correction. That decline found support near $285, giving way to a strong bounce that unfolded at a more vertical trajectory than the prior uptick, carving an Elliott five-wave rally pattern that may have tagged its final target last month. In addition, the long series of highs carved into the July 2017 peak have reversed at a broad rising highs trendline on the logarithmic scale chart. (For more, see: If You Had Invested Right After Amazon's IPO.)
The rally's character changed in November 2015, when the trend eased into a rising wedge pattern that drew exceptionally narrow trading ranges through 2016 and into 2017. This quiet action can be deceptive because high volatility inevitably replaces low volatility, often catching a complacent crowd off guard with expanding ranges that can wipe out carefully placed stop-losses.
The weekly and monthly stochastics oscillators have crossed over into sell cycles in recent weeks, predicting relative weakness that could last into the first quarter of 2018. This marks the first major sell signal since 2016, telling informed market players to take profits, pick up hedges or engage in other actions to control risk. Fortunately, the recent decline is already approaching its first downside target at channel support in place since the first quarter of 2016. (See also: A Big Red Flag Is Popping Up on Amazon Stock.)
AMZN Daily Chart (2016 – 2017)
The stock broke out above the December 2015 high near $700 in May 2016 and bounced at that level in a November pullback. The subsequent rally lifted above the 50-day EMA and held that support until Thursday's session, when the price sold off to a five-week low near $950. This marks the first failure to hold this intermediate moving average in nine months, signaling a bearish feedback loop in alignment with the July reversal and a decline through psychological support at $1,000.
A sell-off to $925 would bring wedge and channel support into play, as well as the deep June low. Meanwhile, the 200-day EMA has lifted above $900, setting the stage for a major conflict between bulls and bears. It is best to view support as a zone between $900 and $925, rather than a narrow line, because higher volatility could trigger a series of expanding whipsaws that take out stop-losses. More importantly, a breakdown through this zone would set off sell signals that could presage a decline into March support at $850. (For more, see: Brands Develop Strategies to Counter Amazon.)
The Bottom Line
Amazon stock is engaged in a progressive decline that has now broken support at the 50-day EMA. This bearish price action favors a test in the $900 to $925 price zone, with bulls needing to exhibit substantial firepower to forego even greater downside. (For additional reading, check out: Amazon Set for 'Spectacular Collapse'.)