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Chart Of The Day: Rare Technical Pattern Warns Amazon Sell-Off May Be Near

By Investing.com (Pinchas Cohen/Investing.com)Stock MarketsDec 16, 2020 09:41AM ET
www.investing.com/analysis/chart-of-the-day-rare-technical-pattern-warns-amazon-selloff-may-be-near-200548084
Chart Of The Day: Rare Technical Pattern Warns Amazon Sell-Off May Be Near
By Investing.com (Pinchas Cohen/Investing.com)   |  Dec 16, 2020 09:41AM ET
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Amazon.com (NASDAQ:AMZN), already the largest retailer on the planet having surpassed Walmart's (NYSE:WMT) position for that benchmark in the middle of last year, was perfectly situated for this year's global pandemic. With COVID forcing consumers to shelter in place, the Seattle-based e-tail behemoth allowed customers to shop from home without having to violate any lockdown orders.

As such, Amazon stands out in a year of fabulous returns for some stocks.

Given the circumstances, traders see it as a forgone conclusion that the stock will just continue pushing higher. Aside from the increasing adaptation to online shopping, Amazon keeps breaking into new markets while also growing its existing efforts. This includes the company’s recent online pharmacy initiative, its autonomous driving startup Zooks which just unveiled a driverless robotaxi, as well as the growth of Amazon Web Service, the company's cloud business that's now also being used by Twitter (NYSE:TWTR).

Analysts believe that the current economic environment justifies the company's extreme valuation. The stock closed Tuesday at $3,165, up 0.26%, and based on its projected free cash flow, which some analyts believe could average out to $43.7 billion projected out through 2021. 46 analysts who provided a price target on the stock for the next 12 months, have a median target of $3,800 with a high estimate of $4,500.

Though we consider Amazon a solid long-term investment, we believe the company’s 72.5% YTD returns to be a setup for a correction as investors look to take profit on a good thing. That dynamic is also visible in the stock’s trading pattern.

AMZN Daily
AMZN Daily

The price appears to be about to break out of a Diamond Top—a combination of a broadening pattern and symmetrical triangle.

This is a rare occuance that, should it appear, almost always takes place at a top, following an extremely sharp price rise. Since its formation requires climactic trading action, it manifests specifically on top, while bottoms tend to be incremental.

Admittedly, March’s sharp V-bottom was an exception. Will that exceptionalism repeat itself now, turning an infrequently seen pattern into a continuation pattern?

While anything is possible, we can only rely on the statistics. The unique environment that forms the pattern’s dynamic, began with wild swings. Those swings preceded an expected large move that never materialized as it turned into a lack of interest due to the cyclical rotation out of technology.

The volume supports the pattern’s implications. It started off with gusto only to fizzle out. Both the 50 and 100 DMAs joined forces with the top of the pattern, revealing the price at this time to be a technical pressure point. If the price breaks through the pattern’s top, it will have blown the pattern’s bearish bias, forcing traders to recalibrate, turning the pattern bullish.

However, yesterday’s hanging man—at this crucial nexus of different technical forces—increases the odds of a bearish confirmation, with a close below the hanging man’s real body (opening-to-closing price). This therefore suggests a downside breakout, in which the 50 and 100 DMAs send the price toward the 200 DMA which is considerably lower.

The pattern’s implied target, obtained by measuring its height—whose interested parties are expected to repeat their moves if they were right, and negate them if they were wrong—puts the stock in the direction of $2,000 rather than the $4,000 range.

Remember, though, that signal is only applicable upon a decisive downside breakout. If it's impossible to see that happening? Consider the ramifications of the EU's current antitrust lawsuit against the company.

Trading Strategies

Conservative traders should wait for a downside breakout of the pattern, with a close below the $3,000 psychological round number, followed by a return move, whose resistance would verify the pattern’s integrity.

Moderate traders might be content with a close below the Dec. 11 low of $3,072.

Aggressive traders may short now, given the attractive risk-reward ratio thanks to the price’s proximity to the pattern top.

Trade Sample

  • Entry: $3,180
  • Stop-Loss: $3,200
  • Risk: $20
  • Target: $3,120
  • Reward: $60
  • Risk:Reward Ratio: 1:3
Chart Of The Day: Rare Technical Pattern Warns Amazon Sell-Off May Be Near
 

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Chart Of The Day: Rare Technical Pattern Warns Amazon Sell-Off May Be Near

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Comments (10)
Ashish Bhura
Ashish Bhura Dec 17, 2020 10:34PM ET
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Do you still think it can break in the downside...i think especially for AMZN and GOOG
Sasanka Valluri
Sasanka Valluri Dec 16, 2020 6:10PM ET
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it broke on the upside
Pinchas Cohen
Pinchas Cohen Dec 16, 2020 6:10PM ET
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Barely, could very well still break to the downside.
Christana Santos
Christana Santos Dec 16, 2020 5:38PM ET
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I really want to invest in your company
Pinchas Cohen
Pinchas Cohen Dec 16, 2020 5:38PM ET
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Is this addressed to me?
Matt Cavagrotti
Matt Cavagrotti Dec 16, 2020 12:42PM ET
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Great - I had just opened up some AMZN call spreads this morning prior to reading this, so your article is scaring the *******out of me.
Pinchas Cohen
Pinchas Cohen Dec 16, 2020 12:42PM ET
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Matt, cheer up. Looks like the pattern could ******out, which would turn the pattern bullish :).
Matt Cavagrotti
Matt Cavagrotti Dec 16, 2020 12:42PM ET
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I see a lot of folks scoffing that this didn't pan out like you'd expected, but I had never heard of this particular technical pattern before, so I'd just like to thank you for bringing it to my attention.
Pinchas Cohen
Pinchas Cohen Dec 16, 2020 12:42PM ET
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Matt Cavagrotti  Pleasure, and aside from their lack of trading understanding, as if each call is expected to pan out, the pattern is now blown out just yet.
James Bell
James Bell Dec 16, 2020 12:10PM ET
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Thank you Mr. Cohen. Your articles are always well done and you address comments.
Pinchas Cohen
Pinchas Cohen Dec 16, 2020 12:10PM ET
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And I'll address this one as well: "You're welcome!" and "Thank you for your kind words!"
joe blow
joe blow Dec 16, 2020 11:51AM ET
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Wrong. AMZN Will break out to the upside after holiday sales are through the roof.
Pinchas Cohen
Pinchas Cohen Dec 16, 2020 11:51AM ET
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Do you know something that isn't public knowledge? If you only know what everyone else already knows, it's priced in.
Christana Santos
Christana Santos Dec 16, 2020 11:51AM ET
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I wants to invest in your company
Mike Brarey
Mike Brarey Dec 16, 2020 10:50AM ET
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Shorted.
Eric De
Eric De Dec 16, 2020 10:50AM ET
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Good job
Eric De
Eric De Dec 16, 2020 10:12AM ET
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Stop loss taken out LOL
Pinchas Cohen
Pinchas Cohen Dec 16, 2020 10:12AM ET
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What do you find funny about that?
Eric De
Eric De Dec 16, 2020 10:12AM ET
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When I read the article the trade was already done with. It just happened too fast thats all. What does it need to hit for the charts to be bullish?
Pinchas Cohen
Pinchas Cohen Dec 16, 2020 10:12AM ET
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Eric De  A downside breakout.
Ashish Rajput
Ashish Rajput Dec 16, 2020 10:01AM ET
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I could see a flag breakout though... Having said that $AMZN poised for $3700/- soon
Pinchas Cohen
Pinchas Cohen Dec 16, 2020 10:01AM ET
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There is no flag.
Eric De
Eric De Dec 16, 2020 10:01AM ET
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Pinchas Cohen  No flag but I see a beautiful kite :) maybe it can fly? :)
Pinchas Cohen
Pinchas Cohen Dec 16, 2020 10:01AM ET
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Eric De  Go fly a kite.
Eric De
Eric De Dec 16, 2020 10:01AM ET
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Pinchas Cohen  That was a nice one :) Good luck! I still think it goes to 3300 by year end and 3500 after earnings. Thank you for your replies and inputs.
Jan Skilbrei
Jan Skilbrei Dec 16, 2020 8:32AM ET
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thanks, very interesting; there is also an inverted (though not perfect) head and shoulder pattern... suggesting an upward continuation (a break into several divisions, can visualize values 'hidden' in the conglomerate, 'SEEN IT BEFORE'...)..my bet is therefore UP
Pinchas Cohen
Pinchas Cohen Dec 16, 2020 8:32AM ET
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Once you play with the pattern like that, you can see a H&S in the opposite direction, as well. This is a Diamond pattern, not H&S.
 
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