Shares of online retailing giant Amazon.com, Inc. (NASDAQ:AMZN) followed a monster year in 2015 with a rocky start to 2016. So far in this young year, Amazon stock is lower by more than 20%.
While I remain notably concerned about AMZN shares in 2016, in the near-term, the stock arrived at a critical technical support area that just might offer active investors and traders an opportunity to play a good risk-reward bounce.
When Amazon reported its latest quarterly results a week ago on Jan. 28, investors let the stock drop. Although the company more than doubled its net income to $482 million, the number was well below what analysts had expected. Amazon also incurred higher costs, part of it from increased shipping costs of products to customers.
Then on Wednesday, news broke that Amazon is looking to open as many as 500 brick-and-mortar stores to compliment its online presence.
Investors didn’t welcome this news, either, and sold off Amazon stock to the tune of another 4%.
While I have little doubt that Amazon.com as a company will continue to reinvent, push forward and otherwise play a dominant role in online retailing, I have concerns for AMZN in 2016. In fact, among my base cases for 2016 are a 20% to 30% drop in the S&P 500, a continued rise in the U.S. dollar and as much as a 40% correction in shares of Amazon.com.
The reason for my concern about Amazon stock is based around the rate of change at which shares ascended through much of 2015, which is simply unsustainable. Gravity will ultimately kick in for any stock that rises too sharply, and that often leads to sharp corrective phases.
AMZN was a shining star in 2015’s low-growth environment, but while the company continues to grow, buyers have finally exhausted themselves.
Amazon Stock Charts
On the weekly chart below, we see that after shares moved higher in an orderly channel for years, Amazon in 2015 began to accelerate higher. It ultimately rallied vertically in the latter part of the year. But the late 2015 highs came on weakening momentum, and as January wheeled around, prices finally corrected.
A good mean-reversion move for AMZN ultimately should see the stock reach the low $400s, which would be a retest of the 2015 breakout level (blue bar) and back into the longer-standing trending channel (red dotted lines).
In the near-term, however, the 20% year-to-date drop in Amazon stock has left its MACD oscillator at never-before-seen oversold readings. Furthermore, shares on Wednesday reached (and marginally breached) the 200-day moving average for the first time since early 2015.
I think Amazon ultimately breaks below the 200-day MA, but for the next couple of weeks, it just might offer some support for a bounce back into the mid-$570s.
Active investors and traders could buy the next bullish reversal day, using the $520 area as a stop-loss on a daily closing basis.
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