The Fundamentals of Amazon Stock Remain Strong, But Investors Should Wait for the Technicals to Improve

Investors should wait to buy the dip in Amazon until AMZN stock becomes range-bound in the $1700s

Amazon stock AMZN Stock

Source: Mike Seyfang via Flickr

From a fundamental perspective, there have been multiple positive developments recently for Amazon (NASDAQ:AMZN) in early October. Yet Amazon stock has failed to rally. Instead, it has dropped significantly.

What is the implication? The fundamentals supporting Amazon stock remain strong. Thus, AMZN stock should continue its long-term uptrend and head higher over the next several years, powered by the company’s robust profit growth.

But the technicals of Amazon stock aren’t that strong. For the first time since late 2017, AMZN stock has broken below its 100-day moving average. Normally, when Amazon stock does this, it tends to trade in a range for awhile before resuming its climb.

Thus, in order to buy this dip in AMZN stock, investors need technical confirmation. Although the company’s fundamentals are strong. we need to see the technicals confirm that Amazon stock can stop falling and trade sideways around the $1,700 -$1,800 level. After that happens, investors should buy Amazon stock.

The Fundamentals of AMZN Stock Are Very Strong

Amazon is taking over commerce, dominating the cloud, making big moves in digital advertising and offline retail, and is on the verge of disrupting logistics, healthcare, and pharmaceuticals.

With respect to those growth drivers, the fundamentals supporting Amazon stock have strengthened dramatically over the past week alone.

Thus far in October, reports leaked that Amazon is launching a free video service through IMDb, giving the internet giant more streaming content to populate with digital ads. The company raised its minimum wage to $15 per hour, side-stepping a potential regulatory crackdown. The National Retail Federation announced that it expects retail sales growth to again be significantly above average during the upcoming holiday season, implying that Amazon will deliver strong fourth-quarter results.

Meanwhile, a consumer survey conducted by Stifel indicated that Amazon was the top source of toys for consumers. That’s a major positive catalyst for AMZN in the wake of Toys R Us’ bankruptcy. Moreover, CNBC reported, citing industry insiders, that Amazon is stealing a bunch of ad dollars from Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL). Google also dropped out of the $10 billion JEDI race, all but guaranteeing that Amazon will win the huge federal deal. And Amazon Web Services signed a new $1 billion deal with SAP (NYSE:SAP) and Symantec (NASDAQ:SYMC).

Given these multiple positive developments, the decline of Amazon stock has created a buying opportunity. The question now becomes when to buy the dip, and to answer that question, we turn to the technicals of AMZN stock.

Awaiting Technical Confirmation From Amazon Stock

Due to Amazon’s robust top-and bottom-line growth, AMZN stock normally trades far above its long-term moving averages. But about once a year, Amazon stock drops back to its long-term moving averages and holds those levels. The shares usually trade sideways for a few months and then resume their uptrend.

Before buying the dip in AMZN stock, investors should confirm that this pattern will indeed play out again.

Specifically, Amazon stock just broke below its 100-day moving average of $1,820. The stock has done that twice before over the past two years, in August 2017 and October 2016. Both times, Amazon stock broke below the 100-day moving average, hit an absolute bottom about 5%-10% below the 100-day, traded sideways around the 100-day for two to three months, and then resumed its long-term uptrend. 

From this perspective, preservation of the 100-day moving average isn’t the important technical aspect. The important technical aspect is that Amazon stock can stabilize its losses just below the 100-day moving average. That would imply stabilization in the $1,700’s. If that happens, then Amazon stock is simply repeating history. If Amazon stock conforms to its usual pattern, it will consolidate around these $1,700 levels before resuming a longer-term uptrend.

Bottom Line on AMZN Stock

The long-term fundamentals supporting Amazon stock pave the path for a $2 trillion valuation within the next several years. Meanwhile, the stock’s near-term fundamentals have improved significantly over the past few weeks, as Amazon has expanded its dominance in e-commerce and the cloud, while growing its presence in advertising and offline retail.

Overall, the company’s fundamentals remain very strong. Thus, this is a dip worth buying once the technicals confirm that the selloff of Amazon stock has moderated. If AMZN stock starts to trade sideways just below the 100-day moving average in the $1,700’s, that will be confirmation that the selloff has moderated. At that point, investors should consider buying the dip in Amazon stock.

Until then, the best call is to either ride out the volatility or stay on the sidelines.

As of this writing, Luke Lango was long AMZN and GOOG. 

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