Ride the Rapids in Amazon
Amazon (AMZN) topped out at an all-time high in October, just one week after most stocks ended their summer corrections. This upside-down behavior has continued into 2012, with the online retailer lost in a deep funk during the biggest bull advance in years. Shareholders must be losing sleep, thinking about missed opportunities and subpar first-quarter returns.
While the stock has stopped falling in the past two months, it isn't showing a single sign that it's getting ready to jump on the tech or retail rally wagons. In fact, price action isn't showing much of anything at the moment, technically speaking, which is quite odd for a major Nasdaq 100 component. However, this deader-than-dead zone could signal a major turning point.
Volatility, bar width and volume all tend to contract when a trading range nears its conclusion and is preparing to transition into a new trend, higher or lower. Put another way, Amazon may be setting up an explosive rally or nasty selloff that will be very rewarding for traders -- as long as they get the direction right.
Amazon (AMZN) -- Weekly
Source: eSignal
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The stock rallied above 10-year resistance at $115 (red line) in October 2009 and entered a powerful uptrend that peaked near $145 less than two months later. It spent the next nine months grinding sideways, testing new support. Price held firmly above $100 during two selloff attempts and entered a new uptrend in the fourth quarter of 2010.
That rally leg pushed over $200 in May of last year. Volatility increased immediately, with a series of sharp downswings and equally sharp bounces. The stock posted its top tick at $246.71 on Oct. 14 and then turned sharply lower, grinding out a three-legged decline that hit bottom at a multiyear trendline during the last week of December.
Amazon (AMZN) -- Daily
Source: eSignal
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Price action since October shows an ugly breakaway gap that ended the uptrend, followed by waves of selling pressure as institutions dumped the stock and rotated capital into other tech and retail components. The decline hit bottom in December, at the same time it posted a lower low on On Balance Volume (OBV), my favorite accumulation-distribution indicator (red lines).
Amazon then eased into a symmetrical triangle, with resistance at the 200-day exponential moving average (EMA) and support at the trendline. The 50-day EMA is still falling, although the stock hasn't budged in more than two months. It's now posted two lower highs and two higher lows within the pattern. This sequence predicts the trading range is nearly completed and ready to yield a new trend, higher or lower.
The triangle pattern is picture-perfect for a bilateral trading approach that enters a position in whatever direction that price finally exits the range. Draw trendlines at both edges of the triangle and then sit back and wait. The trade entry signal will arrive when price lifts above the upper line or falls below the lower line, on a closing basis.
While this is a classic trading strategy, it's also useful for long-term investors wanting to own the stock or establish a short position. Whatever your holding period, place a stop-loss on the other side of the broken trendline, under the low of the breakout bar or above the high of the breakdown bar, and exit when it gets hit -- on a closing basis to avoid intraday volatility.
The perfect alignment between the upper triangle trendline and 200-day EMA predicts a dynamic move if the stock pushes to the upside, because a breakout over the moving average should attract wide attention in the investment community. Key resistance for that side of the trade lies at $220, where the October gap is hiding unhappy bagholders ready to dump positions.
On the flip side, a short sale signal will finally confirm resistance above $200 but traders will need aggressive risk management to benefit from the position: Bulls could make a stand around $170. Once that support level breaks, the March 2011 swing low at $160 is likely to slow the downside and might even offer a final low, ahead of a longer-term recovery.
No positions.