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Amazon In Topping Process

09/14/10 11:05:08 AM
by Alan R. Northam

When we look at the price chart of AMZN, we might conclude that price is either forming a head & shoulders pattern, a double top, or that it just might continue to move to a new higher high. However, when we look below the surface of the price chart, we can see what is really going on.

Security:   AMZN
Position:   N/A

When I look at Amazon in Figure 1, I see three time frames. I see the long-term time frame represented by the 200-day simple moving average (SMA). I see the intermediate-term time frame as represented by the 50-day SMA, and I see the short-term time frame represented by the 20-day SMA. Looking at the long-term trend, I see that price remains above the 200-day SMA, indicating that price is still moving higher over the long term. Or is it? Looking at the 200-day SMA itself, I see that it has turned flat. This tells me that price is the same today as it was 200 days ago. In other words, over the long term, traders has seen no net profit over this time period.

I also see that price, along with the 50-day and the 20-day SMAs, has recently dipped down below the 200-day SMA. This represents weakness in the uptrend. Looking at the intermediate-term trend, I see that the 50-day SMA has moved below the 200-day SMA, indicating that over this time period the trend has reversed to the downside. However, of late, price has moved back above the 50-day SMA and the 50-day SMA is moving higher, indicating newfound strength in the intermediate-term trend. Therefore, I see the hope that the 50-day SMA will cross back above the 200-day SMA and signal the resumption of the intermediate-term uptrend.

Looking at the short-term trend, I see the 20-day SMA has moved above the 50-day SMA, indicating that price is now in a short-term uptrend. Overall, I see that AMZN remains in a long-term uptrend. I see some weakness in the long-term trend, but I also see the hope of a short-term and intermediate-term recovery, leading to the strengthening of the long-term trend. This is what I see looking on the surface of the price chart. But what more can we learn about the overall trend of Amazon if we look below the surface? See Figure 1.

FIGURE 1: AMZN, DAILY. Here's the daily price bar chart with moving averages.
Graphic provided by: MetaStock.
 
Figure 2 shows the price momentum of each of the three time periods. In the top panel I see the long-term momentum of price. The long-term momentum of price is measured by taking today's closing price and comparing it to the closing price of 200 days ago. As can be seen in the chart, price momentum is moving downward and has recently moved down to its zero line. The zero line indicates that price is now the same as it was 200 days ago. A move below the zero line would indicate that price is lower than it was 200 days ago.

One way to determine the direction of the long-term trend is to determine if price is higher or lower than it was 200 days ago. If price is higher than it was 200 days ago, then the long-term trend is upward. If price is lower than it was 200 days ago, then the long-term trend is downward. From Figure 2, we can see that currently price remains above its zero line, indicating that the long-term trend remains upward. However, if the momentum line continues in its current downtrend, it won't be long before the long-term trend reverses its direction from up to down.

The middle panel of Figure 2 shows the intermediate-term trend of price momentum. The intermediate-term trend of price momentum is also in a downtrend, as noted by the lower high and the lower low price momentum pivot points. Over the intermediate term, price momentum is moving upward to test overhead resistance. Price momentum is also currently above its zero line, indicating that price is higher than it was 50 days ago, signaling that price is in an intermediate-term uptrend. However, this uptrend in price may not last very long, as the overall trend of price momentum is still downward. Therefore, I would expect the price momentum line to turn back down before crossing above its overhead resistance line and eventually move below its zero line to signal that the price trend over the intermediate term has turned back downward. The surprise would come if price momentum were to break out of its overall downtrend.

Over the shorter term, price momentum is more cyclical due to its short-term nature, as shown in the bottom panel of Figure 2. The price momentum line in the bottom panel represents the short-term trend of price momentum that compares the current closing price to the closing price of 20 days ago. Note that price momentum is now up against its overhead resistance level set in November 2009. This resistance level has either been approached or touched five times since November and is therefore an important line of resistance. I would therefore expect price to bounce off this line of resistance and turn back down. A move back below its zero line will indicate that price is in a short-term downtrend. The surprise would come if the short-term momentum of price breaks out above the strong line of overhead resistance.

FIGURE 2: AMZN, DAILY. This chart shows the rate of change indicator in three time frames.
Graphic provided by: MetaStock.
 
Figure 3 shows the volume line chart in the lower panel. The upper panel is the daily price bars of AMZN. Note that from July onward, price has been moving in an uptrend. However, the volume line chart has been moving in a downward direction. This is a characteristic of a market correction. Whenever price moves higher while volume moves lower, the rally is corrective and not a sustainable uptrend. The one exception to the downtrend in volume is the huge volume spike in late July. This volume spike represents panic selling, which normally denotes the end of a downtrend and the beginning of an uptrend. However, in the case of AMZN, the panic selling came late.

FIGURE 3: AMZN, DAILY. This chart shows daily price bars in the upper panel and a volume line chart in the lower panel.
Graphic provided by: MetaStock.
 
In conclusion, price continues to move upward and is above the 200-day SMA, signaling that the long-term trend remains intact. However, the long-term and intermediate-term trends of price momentum remain in a downtrend. As long as these two time periods of price momentum remain in the downward direction, price will eventually turn down. Thus, we should consider that AMZN is currently in a topping phase. Over the short term, price momentum is currently overbought, as it is up against strong overhead resistance. This overhead resistance is expected to persist and should turn price back in the downward direction.

As a result of this analysis, I see AMZN in a topping process. I see the stock as having made a top in mid-April 2010, made a new lower low in July, and is now testing the mid-April top. AMZN is either forming a major trend reversal pattern made up of a head & shoulders pattern or is in the process of forming a major trend reversal pattern made up of a double top. The surprise would come if the long-term and intermediate-term momentum of price broke out of their downtrends and volume started to increase again. This surprise would indicate that price is continuing to move higher.



Alan R. Northam

Alan Northam lives in the Dallas, Texas area and as an electronic engineer gave him an analytical mind from which he has developed a thorough knowledge of stock market technical analysis. His abilities to analyze the future direction of the stock market has allowed him to successfully trade of his own portfolio over the last 30 years. Mr. Northam is now retired and trading the stock market full time. You can reach him at inquiry@tradersclassroom.com or by visiting his website at http://www.tradersclassroom.com. You can also follow him on Twitter @TradersClassrm.

Garland, Tx
Website: www.tradersclassroom.com
E-mail address: inquiry@tradersclassroom.com

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