Amazon (NASDAQ:AMZN) is the center of attention mid-October, not just over its $1.6 trillion market capitalization, but because of its Prime Day event. The two-day event spanned October 13 and 14, during which Amazon stock predictably jumped higher.
Now traders are worrying that the rally is just a short-term jump and that a sell-the-news reaction is not only possible, but likely.
Prime Day is usually in July. Due to the novel coronavirus though, the event was delayed. Given the digital transformation we’re seeing in the economy, Amazon was simply too strained to hold its annual event at its regular time. A good problem to have for sure.
Increased online sales coupled with the supply-constraints across multiple industries all but forced the delay. In any regard, here we have it now in the fourth quarter. That’s going to make for one heck of a quarterly result for Amazon.
Think about it: Prime Day in October, Black Friday and Cyber Monday in November, then the holidays in December.
That’s on top of the massive shift we’re already seeing in e-commerce.
The Coronavirus Changed the Game
The coronavirus has changed the way we do business. It’s changing the way companies do business with each other (B2B) and the way they do business with customers (B2C). Everything is moving online.
Grocery shopping is being fed to online orders. In-person meetings are being pushed to Zoom Video (NASDAQ:ZM). Projects are going into the cloud for collaboration and group work rather than passed around a meeting room.
Notice the chart above, courtesy of the St. Louis Fed. It shows the unprecedented acceleration of e-commerce sales as a percentage of retail sales. Lockdowns and fear of going out helped drive sales online and that only makes sense.
However, it will create a level of adoption that, more likely than not, will leave a large percentage of online shoppers sticking to online platforms. Rarely do we see a scenario where consumers temporarily flock to cheaper and more convenient options, only to revert back to less convenient options in the future.
Luckily for retailers like Walmart (NYSE:WMT), Target (NYSE:TGT) and others, they have been working on omni-channel and online solutions for years. They were ready this time. Even Amazon has pushed its operations to the brink, trying to keep up with demand.
Maybe it all unwinds in the future, but these trends are likely to hold. The coronavirus didn’t necessarily create new trends, it simply accelerated the ones already in place. For Amazon, that’s exactly what it needed.
Trading Amazon Stock
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When Amazon stock broke out over $3,250 in mid-August, it ran to $3,552 before topping out. Shares came down hard in September, along with the rest of the market. It was a painful move for traders who got caught up on the wrong end of that trade.
However, after finding its footing, shares got back into “rally mode,” again rallying up to $3,500 before finding it as resistance this week. This level is proving to be a hurdle for Amazon.
While most investors enjoy the rallies, it’s only healthy (and realistic) to expect some pullbacks along the way.
For Amazon stock, we have a great-looking seven to eight week “cup” — highlighted by the purple U-shaped line on the chart. What we need to see now is the “handle” form, and if that’s the case, it’s actually quite healthy price action.
Really, the stock can fill this week’s gap toward $3,289 and test the 10-day moving average in the process. A bit more selling pressure wouldn’t be unusual though, putting the 50-day moving average and a retest of the $3,250 breakout area in play.
If that zone around $3,200 or so holds, Amazon stock still looks okay to me. Ultimately we want a retest and breakout over $3,500.
Notably below $3,200 and we could start to see some issues. Specifically, it puts this month’s low in play at $3,090, followed by the 20-week moving average near $3,045. If those fail to hold, the September low is up next, at $2,871.
Bottom Line on AMZN
At the end of the day, Amazon is a powerhouse stock. Its e-commerce platform is seemingly indestructible, while its cloud business remains robust. But this isn’t new information.
What we need to see is Amazon maintain momentum in its business. Robust Prime Day sales –third-party sales are reportedly up 60% year over year — could help drive a positive narrative in the short term. However, this quarter will play a bigger role, as it captures so many key events for Amazon.
If momentum wanes in the business, then momentum will surely wane in Amazon stock. Currently, analysts expect sales growth of more than 31% this year, followed by a 38% acceleration in earnings. For 2021, estimates call for 18% revenue growth and a near-40% jump in earnings.
Amazon stock has “long-term winner” written all over it. But investors should allow the technicals to help guide them on their entries. A close below $3,200 could accelerate the selling pressure in the short term.
On the date of publication, Bret Kenwell did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell.
