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Chart Of The Day: Amazon To $150

Published 08/01/2022, 08:55 AM
Updated 07/09/2023, 06:31 AM

Amazon.com (NASDAQ:AMZN) surged 10.3% on Friday after posting second quarter earnings. The jump extended monthly gains to a whopping 27%, rendering it the best performing month since October 2009. The powerful rally rebounded from a three-month losing streak when the company lost 34.8% of its value on concerns that dramatically rising inflation and a shrinking economy would severely reduce the retailer's sales. However, the company's results beat estimates.

Bloomberg Intelligence analysts argue that Amazon is sufficiently robust to withstand rising prices. Prime members have substantially increased spending since the start of the pandemic. Unlike Walmart (NYSE:WMT), which caters to cost-conscious customers, Amazon also has income streams from affluent customers. Also, Amazon's (third-party) marketplace provided another income stream, as it provides a broader selection and price diversity, a spectrum traditional retailers lack.

From a technical standpoint, Amazon's July performance being its best since it bottomed with the rest of the market after the 2008 crash appears to contradict my overall market position. My readers know that I have been bearish (here is my latest take on markets). I appreciate the apparent contradiction in being bearish on markets and bullish on Amazon, an economic bellwether.

However, I am bullish on Amazon only in the short to medium term. Second, as I've demonstrated above, Amazon has turned into a complex business that can navigate via different economic climates. Finally, the interest cycle is the most significant difference between 2009 and now. In 2009, QE started. QE ended, and the Fed ushered into the sharpest tightening in decades.

And at the final analysis, as an individual trade goes, I am relying on the forces of supply and demand.

Amazon Daily Chart

Amazon's shares seem to have bottomed with a powerful rising gap. However, there is apparent resistance. First, the Jan., Mar., and Apr. low of a range that is a mirror image of the bottom. Second, the price didn't fill the Apr 29 breakaway gap.  Finally, trading jumped up and down but closed unchanged, forming a high wave candle. This pattern doesn't just show confusion but fear. Traders run here and there but can't pick a direction. Still, the price often returns after a breakout, at the end of a short squeeze. If the price finds support, it evidences ongoing demand, bulls rather than bears.

Trading Strategies

Conservative traders should wait for the price to complete a full return move and demonstrate pattern integrity before risking a long position.

Moderate traders would wait for a pullback for a better entry if not for trend confirmation.

Aggressive traders can enter a contrarian trade, counting on the evidence of resistance to propel a return move before joining the rest of the market in an extended position. Ideally, you'd operate according to a plan that incorporates your timing, budget, and temperament. Still, until you learn to do so, you may use my generic example, recognizing its reduced effectiveness individually.

Trade Sample - Aggressive Short Position

  • Entry: $135
  • Stop-Loss: $138
  • Risk: $3
  • Target: $126
  • Reward $9
  • Risk-Reward Ratio: 1:3

Author's Note: I am not in the business of "fortune telling." I am an analystwhich means that I analyze the preponderance of the evidence as I understand it and offer a prognosis. A market study is based on the past and statistics. Trading success comes with patience, perseverance, and discipline over time. Success is measured overall, not on a trade-by-trade basis. Before you take this trade, close your eyes and imagine you will lose. If you can't handle that, do NOT enter this or any other trade. 

The author currently does not own any of the securities mentioned in this article.

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