Shares of Amazon.com, Inc. (NASDAQ:AMZN) have rallied nearly 37% so far in 2018, continuing their latest steepening of the ascent that began in October 2017. While momentum traders are loving the move and I certainly want to respect the longer-term growth prospects of the company, to my eye the ascent is now reaching unsustainable trajectories.
I often remind my clients as well as readers of this column that trading and investing is all about time frames. In other words, one could be entirely correct on a stock’s longer-term prospects but be very wrong in the near term, and vice versa.
This is also the the reason why in this daily column here, I always first look at the stock or exchange-traded fund in question through a longer-term lens before analyzing the daily charts.
AMZN stock for the most part since October 2017 has been a momentum trade that pleased bulls of all time frames. However as we will see on the charts, the momentum may now be getting over extended again.
Amazon Stock Charts
Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week
On the multiyear weekly chart, we see that starting in early January of this year, AMZN stock began a steep breakout of the multiyear up-trending channel. Given enough time, a steep slope that goes vertical or “parabolic” will ultimately endure a meaningful sideways pause or corrective period.
Momentum as represented by the MACD oscillator at the bottom of the weekly chart continues to hit new record highs. While this confirms the strong up-trend in the stock, it also makes the stock more vulnerable with every up tick.
Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day
On the daily chart, we see the steep 2018 better. Thanks to the early February “dip” where AMZN stock quickly dropped 15% we can now draw an even better channel (black parallels). Through this lens note that over the past couple of trading sessions the stock is once again tickling the very upper end of said channel.
At this juncture, momentum traders would be wise to remember that steep slopes like these usually see a stair-step move higher, followed by an elevator move lower.
In other words, momentum traders at this point are facing notably worsening reward to risk on the long side. Upon any strong daily bearish reversal, the stock could even set up for a mean-reversion lower back to the low $1,500’s.
Check out Anthony Mirhaydari’s Daily Market Outlook for March 13.
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