by Serge Berger | February 13, 2014 8:15 am
Amazon.com (AMZN) was downgraded by a UBS analyst Wednesday, but despite the uproar among investors and traders on the back of the news, AMZN stock held up relatively well — at least thus far.
The analyst not only took his rating down from a “buy” to a “neutral,” but also lowered his price target for AMZN stock from a previous $450 to $375.
Amazon recently discussed hiking prices of its Amazon Prime service, which is at the core of the UBS analyst’s concerns around AMZN stock. In the research note, he highlights that a recent survey found Amazon Prime subscribers are much less prone to renew the annual subscription at a higher price level. (For my two cents, I view the results of this survey to be somewhat premature, thus making such a fairly drastic downgrade of a stock based on this fairly wild.)
However, the much more pressing question that most of my clients had yesterday was “How do we invest and trade AMZN stock now after this 3.75% drop on Wednesday?”
First and foremost, analyst upgrades and downgrades typically only lead to short-term rallies and selloffs in a stock, thus making any big bets on this one-day move rather silly. However, the price action in AMZN stock during the past two weeks does reveal some interesting patterns.
So, now let’s understand that with the recent selloff that began in late January, AMZN stock has so far simply mean-reverted, and that is healthy. Currently, Amazon sits just above the uptrending channel that until October had been in place since late 2012. A better mean-reversion move would take AMZN stock back into this range (two black parallels), possibly toward the 200-day simple moving average (red line).
On the daily chart, note that AMZN stock over the past few trading days has found resistance at its 100-day MA (blue), which also coincides with what we refer to as a bear flag pattern (black parallels).
So, in terms of the near-term plan to play AMZN stock, it’s fairly straightforward. A break below the bear flag (i.e., below about $345) would call for a move toward at least the 200-day MA, currently near $324. Also, this would get Amazon moving back into the longer-standing trading range.
On the other hand, should AMZN stock get it back together and in coming days somehow get back above the 100-day MA, it could be an opportunity to buy the stock for a move toward $390.
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Learn more about the strategies Serge Berger uses to create profits in the market every day. Download his trading plan in the Essence of Swing Trading e-book by clicking here. As of this writing, he did not hold a position in any of the aforementioned securities.
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