Amazon's Sideways Correction

01/13/04 01:02:07 PM

by David Penn

A double zigzag appears to be ending in Amazon (AMZN), which could mean new multi-month highs.

Security: AMZN
Position: N/A

At the barest minimum, Elliott wave methodology is somewhat akin to cartography, or the study of maps. Even if an analyst, trader or investor is skeptical of the predictive power of Elliott wave charts, the ability to describe specific types of market movement, descriptions that can then be compared with future market movements, is an ability that even a cursory study of Elliott wave can provide.

For example, knowing that "fourth waves" in an Elliott progression tend to be complex and often sideways consolidations in the wake of strong trends can help a trader avoid becoming too bearish too soon (in the case of a market that had been advancing). Instead of seeing each minor decline in such a sideways consolidation as the first stirrings of a major decline, a trader familiar with fourth wave can (a) switch focus from trend-oriented indicators to consolidation-oriented ones such as RSI and stochastics and (b) prepare for the possibility of a breakout that will resume the previous trend.

I suspect that AMZN, which has been in a mildly downward correction since peaking in early October 2003, might be an example of just such a consolidation. Since the October peak of 61.15, AMZN has fallen as low as 47 in mid-December and rallied as high as 55 in late December (actually 54.94) in a sideways movement that can tentatively be described, using Elliott wave "cartography" as a double zigzag.

This three-month, largely sideways, correction may act as a launching pad from which higher prices follow.

Graphic provided by: eSignal.

What is a double zigzag? Without getting too deep into Elliott wave terminology, understand that Elliott wave corrections are typically three wave movements (an A wave, a B wave, and a C wave). A zigzag is a form of this three wave movement, and a double zigzag is essentially a combination of two, three-wave movements. In terms of labeling such a pattern - again, dipping back into the Elliott wave lexicon - we would still begin with A-B-C, then an intervening "X" wave, then a concluding trio, A-B-C. Looking at AMZN, the first three would be represented by the market movement from the gap down in mid-October to the November low. The intervening "X" would be represented by the rally into early December. If this pattern does in fact turn out to be a double zigzag, then the second and final third would be represented by the price action from the December decline, through the rally in the second half of the month, and then to what is currently the January low.

Importantly, here is what Elliott wave proponents A.J. Frost and Robert Prechter had to say about such patterns in their book, Elliott Wave Principle:

In all of these cases the market is hesitating and acts as if one three weren't enough, as if more time were needed to straighten out whatever 'reasons' the market had for pausing in the first place. Sometimes stock prices seem to be waiting for economic fundamentals to begin to catch up with the market's expectations %85 These formations frequently give rise to strong subsequent action.

While Frost and Prechter do not ascribe a specific direction to "breakouts" from these formations, the context in which AMZN finds itself does lead to the notion that a move to the upside is more likely in AMZN than is a major move to the downside. What do I mean by "context"? I am referring specifically to the technical condition of both AMZN the stock, as well as the broader context of the bull market in stocks that has prevailed since (at least) March 2003. AMZN, for its part, has just completed a "buy hook" in its stochastic. This "buy hook" is a term derived from trader and Market Wizard Linda Bradford Raschke's "ANTI" set-up (see her "Street Smarts" co-authored with Laurence A. Connors) and refers to the action in the stochastic in January. Note how a declining stochastic bottomed after moving down from an overbought condition and "hooked" back up. Writes Raschke:

I have also entered many times after the 'hook' in the fast line has occurred. This is usually a strong enough pattern that it is OK to enter a bit late.

Additionally, consider the rebounding MACD histogram, which has also moved from an overbought peak late in December to mildly oversold in early January. Combined with the bullish "buy hook" in the stochastic (7, 10), as well as the prevailing bullishness in the market and in the stock (which has only recently dipped below its 50-day exponential moving average), the bullish indications from the MACD histogram only add to the probability of higher prices - as opposed to lower prices - in AMZN in the near-term.

David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine, Working-Money.com, and Traders.com Advantage.

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Amazon's Sideways Correction

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