Shares of online retailing giant Amazon.com, Inc. (NASDAQ:AMZN) are still higher by roughly 75% year-to-date, vastly outperforming the broader stock market. And AMZN stock remains one of the few believable growth stories out there, which is what is keeping Amazon bid so high.
But while in my mind there is no doubt that Amazon is doing great things, AMZN’s stock price looks to be due for a serious mean-reversion move to the downside.
Gravity is a basic principle of nature; what goes up must come down. Yes, Amazon.com has great prospects of further building out its retailing and cloud businesses, and the positive noise around its plans on using drones for package delivery (among other things) is enough to get the novice investor chasing AMZN stock higher, too.
After being a trader and investor for nearly 20 years, however, I can tell you that when a stock rises too steeply, it always, always mean-reverts back lower.
Before looking at the charts, please keep in mind that Amazon.com is scheduled to report its next batch of earnings on Oct. 22, so circle that date on your calendar.
AMZN Stock Charts
The crux of my concerns around Amazon stock lies on the following multiyear weekly chart. AMZN continues to ascend off its 2009 lows in a cone-shaped trading range. Note that each time the stock reached the upper end of this formation (i.e., ascends too quickly) it began to mean-revert meaningfully.
The sharp year-to-date rally, however, has not seen a good push lower and back into the cone-shaped range. But ultimately, gravity is destined to do its work on this 2015 run-up, and likely will bring AMZN stock meaningfully lower (toward the mid- to low $400s).
To be clear, this is not an immediate-term call for the stock to crater, but I would caution traders and investors alike from chasing Amazon shares higher at these levels. Active investors and traders could look to sell or short AMZN stock into rallies while longer-term investors may either sell calls against their holdings for now — but ultimately, the latter group would be wise to also sell down their positions and look to add again at much lower prices.
My time-frame expectation for AMZN stock to see a big mean-reversion move lower is as little as three months and as long as nine months from now.
On the daily chart, we see the giddiness of Amazon investors. Note the two still unfilled up-gaps marked by the blue boxes. There also was an up-gap following the July earnings report, which has since filled; at the time, I used it to sell out-of-the-money call spreads for nice profits.
It’s fair to also point out, though, that AMZN stock has held and bounced off its blue 100-day moving average in August, and has since clawed its way back up toward horizontal resistance near the $550 area.
As such, there is a real chance that the stock sees another push higher from here. As mentioned above, active investors would be wise to sell, short or sell out-of-the-money calls or call spreads once this happens.
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Successful trading and investing starts with a plan. Download Serge’s essential trading plan, The Essence of Swing Trading e-book. As of this writing, he did not hold a position in any of the aforementioned securities.
