First Bounce Fails For Amazon

03/01/06 07:53:22 AM

by Arthur Hill

Amazon's first bounce off support failed, but a positive divergence in RSI should be watched for a second try.

Security: AMZN
Position: Hold

It has been a wild and wooly ride in Amazon (AMZN) lately, and the stock is consolidating at broken resistance. AMZN established resistance at $40 with two reaction highs in March and June. The stock broke resistance in July, and this level now becomes support. Despite the gap down in early February, the stock consolidated just above $37 to validate this support level.

FIGURE 1: AMAZON. AMZN appears to be consolidating at broken resistance after a roller-coaster ride.

Graphic provided by: MetaStock.

Graphic provided by: MS Quotecenter.

The February gap is holding, and I am watching the consolidation boundaries for the next signal. The stock has traded between $40 and $37 since February 3, and these are the key short-term levels. Considering the wild gyrations since July 2005, this is a pretty tame period and could mark the calm before the next storm. A move above $40 would break consolidation resistance, affirm support, and open the door to a decent bounce. Conversely, a move below $37 would break consolidation support and major support. This would signal a continuation of the January–February decline. Ouch!

While the stock closed below its lowest level of the month, the relative strength index (RSI) remains above its February low. This means that a positive divergence is brewing — but not quite ready to drink. RSI is still trending lower, and we need to see a break above the red trendline to reverse downside momentum. A move above $55 would do the trick, and this could be used to confirm a breakout at $40.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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First Bounce Fails For Amazon

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