Amazon Shrugged

07/21/04 01:58:59 PM

by David Penn

A head and shoulders top in the hourly chart of this internet stalwart suggests lower prices for Amazon in the near term.

Security: AMZN
Position: N/A

Market commentator Jim Cramer has referred to Amazon.com as one of the "four horsemen" of the Internet (eBay and Yahoo are among the others, I believe). Anyone who lived, invested and/or traded through the late 1990s will recognize Amazon as one of the winners of the Internet boom, a boom that left more than a few e-casualities scattered across the cybersphere. During the bull market of the past year, Amazon was one of those generals from the last war that had come back -- MacArthur-like -- to lead another charge against pessimism, defeatism and stock market bearishness.

Since the May 2004 lows, Amazon has been in its own little mini bull market. From a low of about $41 in mid-to-late May, AMZN climbed to more than $54 by the end of June, nearly a 32% gain.

Further declines should be right around the corner as Amazon struggles to test a neckline that has turned from support into resistance.

Graphic provided by: Prophet Financial Systems, Inc..

However those eye-popping gains appear in danger of disintegration -- at least if the head and shoulders top shares of Amazon have slipped into has its way. Although lopsided and downwardly sloping, this bearish reversal/topping pattern has already resulted in a sharp price break in Amazon, with prices slipping beneath "neckline" support near 48 to as low as 45.25 before bouncing up barely over 46.

This reversal should not be a great surprise. While it is true that stocks -- particularly Nasdaq stocks -- have appeared to be slipping back into bear market mode, it is no less true that, even on its own merits, AMZN's nearly-straight up rally in late May augured an equally "straight" ride down as soon as enthusiasm for the stock subsided.

What sort of downside might Amazon have in store for shareholders (and short sellers!)? Given a formation size of about seven, and a neckline that is at about 47.5 when it is broken, traders and investors should be prepared for a significant decline, perhaps a decline to as low as 40 or 41 in an initial move down.

David Penn

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

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HEAD & SHOULDERS

Amazon Shrugged

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