Shares of auto-parts retailer AutoZone (NYSE:AZO) just two days ago were higher by 30% for 2019. The most recent rally attempt, however, was quickly blocked and AZO stock since developed a classic B2 bearish reversal that now sets it up for a short-side swing trade.
From double tops to breakout fake-out moves and more … they all signal the same thing.
Technical analysis does a good job in assigning striking names to various chart patterns, but the way it is classically taught mentions awfully little about the read on investor psychology inherent in charts. Over the course of my career as a trader and investor, I have learned to pay close attention to what a chart tells me about investor positioning, i.e., investor sentiment like greed and fear.
Often times a chart does a better job at hinting at excessive greed or fear on the part of investors than anything else.
AZO Stock Charts
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To wit, when looking at the multi-year weekly chart we see that thanks to its sharp year-to-date rally AZO stock recently found its way back up to the longer-standing black line of resistance. It has been one heck of a rally for the stock over the past couple of years and this is also reflected on the weekly momentum charts.
The weekly MACD momentum oscillator recently spiked to an all-time high for the stock, which in my experience and all else being equal, is a better sell signal than a buy signal at the very least. Of course, what most oscillators do is essentially express how steep a rally has been and looking at the move over the past couple of years we note an ultra-steep move to the upside.
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On the daily chart, we see that after exhausting itself in mid-April, AZO stock pulled back about 9% in a refreshing pause of sorts … only to then attempt another rally back to those highs over the past week or so.
On May 28, the bulls tried all they had to push this stock higher and above the April highs, but they failed as they simply ran out of buying power. In other words and through the lens of investor psychology, most people who wanted to buy AZO stock in this time frame already owned it.
This lack of buying power was followed on May 29 by a so-called “follow-through” selling day, which now marks a clear spot of buyer exhaustion on the chart, namely the May 28 highs around the $1,080 mark.
From here, a straightforward short-side swing trade sets up:
Short AZO stock around $1,025 – $1,040 with the first downside target at $980 and a stop loss at $1,080. Alternatively, one could buy a July 1,030 strike put or a July 1,030 – 980 bear put spread.
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