Amazon Could Sell Off Through $1,500 in Fourth Quarter

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Amazon Could Sell Off Through $1,500 in Fourth Quarter

Amazon.com, Inc. (AMZN) stock has broken narrowly aligned support between the 200-day exponential moving average (EMA) and a rising trendline going back to February 2019, and the price could drop below $1,500 in the fourth quarter. The decline would offer growing evidence that tariffs are taking their toll on the e-commerce giant’s profitability, with the retail-heavy tranche scheduled for December acting as an additional roadblock to investor buying interest.

The stock has struggled since stalling within 15 points of resistance at the September 2018 high in July, dropping quickly to the $1,750 level and failing to bounce through September. Frustrated dip buyers are now hitting the sidelines, allowing the stock to break support and fall to a five-month low at $1,723 on Wednesday. It turned lower on Thursday after a weak bounce, raising the odds that it will confirm the breakdown and enter a sizable selling wave.

The July reversal also raises the threat that broad price action since early 2018 is carving a massive double top pattern that will eventually signal the end of the multi-year uptrend through a decline that breaks the deep December low near $1,300. Unfortunately for bulls, that could happen quickly if upcoming trade talks with China fail to clinch a deal that takes tariff headwinds off the books.

AMZN Long-Term Chart (1997 – 2019)

TradingView.com

The company came public in May 1997 at a split-adjusted $1.97 and fell quickly to an all-time low at $1.31. A healthy uptick expanded into a full-blown parabolic rally in 1999, driven by the internet bubble, but the unsuitable trajectory flamed out just above $100 a few months later. That peak marked a high that wasn’t challenged for the next 10 years, giving way to a steep downtrend that posted a three-year low at $5.51 after the Sept. 11 attacks in 2001.

A strong bounce ended in the low $60s in 2003, yielding narrow sideways action into a 2007 breakout that stalled 12 points below the 1999 high in 2007. The stock lost about two-thirds of its value during the 2008 economic collapse, but the higher low posted in November acted as a springboard for a recovery wave that completed a breakout above decade-long resistance in the of fourth quarter of 2009.

The stock tested new support into 2010 and took off in a historic trend advance, driven by the nationwide buildout of high-speed Internet, underpinning an e-commerce revolution that’s still underway as we head into the new decade. The rally entered a more vertical phase after price action completed a broad basing pattern at $300 in 2015 and accelerated once again after a pullback into early 2016.

Straight-up action carved a climactic rally wave into September 2018’s all-time high at 2050, while the subsequent reversal generated more than 700 downside points into the December low. The first signs of trouble in 2019 began in April after the stock traded above $1,900 for the first time in six months, yielding whipsaws ahead of a final rally wave to $2,036 on July 11. It’s been all downhill since that time, with the most recent downdraft piercing the .382 Fibonacci rally retracement level at $1,769.

AMZN Short-Term Chart (2017 – 2019)

TradingView.com

The bounce into 2019 carved three waves into July that could form the first wave of a new Elliott five-wave rally set, but the June low undermined that potential when it traded through the top of the January consolidation. Meanwhile, the correction since July looks set to enter a third or C wave downtrend that measures all the way down to the .786 retracement at $1,462. The stock needs to hold that level at all costs to reduce the risk of a multi-year top.

The on-balance volume (OBV) accumulation-distribution indicator posted an all-time high with price in 2018 and entered a distribution phase that ended at a nine-month low in December. OBV has moved in lockstep with price throughout 2019, telling market technicians to watch this correlation near the June low (red line). An indicator breakdown ahead of price would be bearish, indicating that the decline will carry further than expected while placing the uptrend at greater risk.

The Bottom Line

Amazon stock has broken seven-month support and could trade below $1,500 in the fourth quarter.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.