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AMZN Stock Is Open to a Bear Raid

Thursday's selling sends Amazon down to vital technical resistance


As the wars over digital music streaming continue to rage on, larger players are trying to get a piece of this action, among them online retailing giant (AMZN).

Daily stock trading advice at Beat the BellWhile Amazon previously announced its entry into the streaming music business, yesterday’s launch of the service led to a negative reaction in AMZN stock, which occurred right at a technically significant resistance area. If you’re a bear, you might consider pouncing on this area.

Amazon Prime Music, as the service is called, offers listeners ad-free streaming music of more than 1 million songs. Music aficionados and analysts, however, were quick to point out that the music catalog available in Prime Music is small compared to its competitors and that Amazon thus far doesn’t have an agreement with Universal Music Group, which is considered to be the world’s largest.

Still, one of Amazon’s major advantages is its size and client base, which among other things allows it to bundle services together with its economies of scale, and through this constantly dangle products in front of these clients noses. The Amazon Prime Music service, for example, is initially being offered for free to Amazon Prime clients, which is Amazon’s annual premium service bundling free shipping, video streaming and more together for $99 per year.

From a more structural and psychological point of view around Amazon’s shares, the current consensus from the analyst community is overwhelmingly bullish, with 27 “buy” ratings, 11 “outperform” ratings and just 10 “hold” ratings.

While I can’t be a bear on AMZN stock for the long haul, it is the near-term technical picture that flashes a starkly different signal from what analyst recommendations show.

AMZN Stock Charts

First, let’s note that on AMZN stock’s weekly logarithmic multiyear chart, shares this week revisited the broken 2012 uptrend from below. This type of retest is classic technical analysis 101, and implies that the oversold bounce off the early May lows is over and that a next leg lower is underway.

Furthermore, again using textbook technical analysis, this would now call for a move to a lower low vs. the early May lows.

In many ways, yesterday’s nearly 3% drop in AMZN stock was a straightforward “sell the news” event. But the juicy bits here lie in the details.

Note that on Wednesday, the stock bumped into a major confluence resistance area made up of the January diagonal resistance line (black) and the 100- and 200-day simple moving averages (blue and red lines, respectively). On Wednesday, AMZN stock already rejected this resistance area on an intraday basis, leading the stock to close the day in bottom end of the day’s range. Thursday’s action was classic follow-through and confirmation selling of Wednesday’s intraday weakness, and thus confirmed that the resistance which the aforementioned confluence area offers is to be taken seriously in the near term.

AMZN stock chart daily 061314
Click to Enlarge

Active traders and investors now have a very defined area to lean against on the short side, namely Wednesday’s intraday highs near $340. On the downside, AMZN stock could well move to a lower low vs. the May lows in coming months, although for my part, a next downside target near the $300 mark strikes me as more realistic.

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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.

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