Everyone knows that things change in the market, especially when the technical backdrop is as volatile as this market has become. That said, a few months ago, we wrote about a bullish view our research had taken on Amazon.com, Inc. (NASDAQ:AMZN) — an outlook that has deteriorated recently for a number of reasons.
The biggest catalyst was the reaction to Amazon’s last earnings report. Clearly, AMZN failed to impress the “crowd” as its quarterly numbers were followed by a swift decline in the Amazon stock price, which fell from its highs at $635 to a bottom of $475. This move initiated the tectonic shift in AMZN’s price trend that has now downgraded our model’s outlook.
As a result of the selloff, the 50-day moving average is in a firm decline, indicating that there is better than a 2-to-1 probability that each trading day will result in losses for Amazon stock. This outlook is the result of our model’s historical analysis of AMZN prices since 1999.
Other Factors Weighing on Amazon Stock
In addition to lackluster technicals, Amazon is beginning to suffer from being an overloved commodity on Wall Street. Simply put: Amazon stock has attracted too many bulls, a condition that almost always makes it harder for a stock to continue a climb higher.
For example, 87% of analysts covering the Amazon have it ranked a buy, compared to zero sells. The fact the vast majority of analysts have Amazon shares already ranked a buy means that there is less of a chance for upgrades to drive prices higher. The flip side of this is that the swelled percentage of buy recommendations means that there is a higher chance for downgrades, which fuel selling.
Similarly, short interest activity has been relatively quiet.
Short interest peaked in September 2015 ahead of a strong rally in Amazon stock prices. That short interest has since been closed, taking a potential short covering rally off of the table. We would like to see a sharp increase in shorts take place to signal that sentiment was starting to signal the fear that is typically associated with bottoms in stock.
For now, the contrarian bulls will have to keep waiting.
AMZN Could Drop by Double Digits
The lackluster sentiment indicators suggest that Amazon stock has further to fall, as we have yet to see a “capitulation moment” for Amazon.
This comes as the stock approaches a critical technical test that may lead to another 15% decline.
As of this week, Amazon shares are entering what we often refer to as a “squeeze play.” A squeeze play happens when to or more key technical trendlines are in the process of colliding, usually forcing the stock to break either higher or lower as a result.
In this case, Amazon’s declining 50-day moving average is preparing to cross below its 200-day — a traditionally bearish pattern. For the past few weeks, Amazon shares have been bound by these trendlines, but the pending cross will likely cause the stock to break below support and take a new technical target of $480, about 12% lower than current prices.
Given the technical and sentiment backdrop on Amazon shares, the bulls are likely ready to start selling the shares to pocket any profits they still have. Investors and traders should consider the $550 level as the “must hold” price as sustained prices lower than this will start to pressure the bulls, resulting in downgrades and additional selling pressure.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.
