Amazon.com Looks Attractive on Multiple Levels
01/31/2011 10:59 am EST
Amazon.com (AMZN) presented their earnings on Thursday night and the price reaction was similar to many of the current rally leaders—it fell…and it fell big—from an intraday high of $185 to a low of $165. When this happens, you hear a lot of “The sky is falling” predictions. But what does this reaction mean about future price action? Let’s muse over the charts in a few different time frames and gain better perspective. Below is the monthly chart.
Stepping back gives a bit of perspective. This monthly chart shows the full lifespan for AMZN since 1997. There are several ideas illustrated here. First note that the simple moving averages (SMAs) are all pointing higher. If this initial reaction holds, that will not change that the trend of the SMAs pointing higher. Second, notice that price is just now tangling with 61.8% (an important Fibonacci level) above the highs of the move from its initial listing to the first peak in 1999 at $182.02. Some resistance should be expected there.
Next, the price had been trading in a rising channel and recently broke the channel higher. It would be normal for the price to retest the break of that channel at about $170. Fourth, the relative strength index (RSI) is becoming a bit overbought; not materially, but something to watch. The Moving Average Convergence/Divergence (MACD) indicator is still large and bullish.
Finally, if it does pull back here, I have proposed a bullish Elliott Wave count putting AMZN in the corrective wave (iv) within wave (5) of the motive wave (III). All that means is that it would be due for a pullback or sideways movement over several months before heading even higher to complete the advancing wave, probably near $220 or so. Elliott Wave rules would suggest that the pullback would not go below about $130. So on a longer time frame, there is room for a significant pullback, but not a requirement. Moving to the weekly chart below gives another account of the price action.
This chart suggests that if the downward price action continues, there might be some support at the 20-week SMA at $171, which has also been a previous support area in November. Below that, there is also support at $165 from October 2009 (and near where it appears to be settling in the afterhours market) and then the 23.6% retracement of the up move from November 2008 at $154.57.
Note also the move from the bottom to the consolidation zone and then the break higher, which would suggest a similar move on the upside, giving a longer-term target of $225, which is similar to the monthly target, suggesting any pullback is temporary. Finally, lets move to the daily chart.
The daily chart shows that there have been many bounces in the $155 to $165 area since September 2009. It also gives the 23.6% and 38.2% retracements of the up move from August 2009 at $158.82 and $171.35. I would expect that the pullback would be confined to roughly this range before a move higher. So the pullback on earnings could continue lower, but is likely to find support and move higher again soon. Good luck with it this week.
By Greg Harmon of DragonflyCap.com