Two Gaps To Fill In Amazon

06/01/15 04:52:20 PM

by Koos van der Merwe

It is customary for a share price to fill a gap when one is made.

Security: AMZN
Position: Buy

The share price of Amazon.com, Inc. (AMZN) is reaching new highs, and creating gaps on the way. The rule is that a share price will always fall or rise to fill the gap. Can we expect this to happen with AMZN especially now that there are two gaps to fill?

Figure 1. Daily Chart Showing Gaps. Gaps 1, 2, 3, and 4 were all filled. Gap 5 and 6 have yet to be filled.

Graphic provided by: AdvancedGET.

The chart in Figure 1 is a daily chart showing the numerous gaps created by the stock price as it rose from $35.65 in November 2008 to its present high of $427.63. Note how gap 1, gap 2, gap 3, and gap 4 were all filled with the share price falling to fill the gap as expected. However, gap 5 and gap 6 have yet to be filled. Knowing that this should happen, would you buy AMZN?

Figure 2. Daily Chart Showing Gaps And Triangle Pattern. Can you expect gap 5 to be filled? The relative strength index (RSI) is suggesting weakness but the triangle pattern is suggesting that prices will rise higher. Which is the stronger indicator?

Graphic provided by: AdvancedGET.

Looking at the chart in Figure 2, you can see that gap 6 has been filled, but gap 5 has not been filled. Should we expect the share price to fall to fill gap 5? The relative strength index (RSI) is suggesting weakness, trending down, after giving a sell signal on a triangle which is calling for a rise to $506.34, (452.84-366.39=86.45+ 419.89=506.34). So, which is the stronger indicator — the triangle formation or the RSI? Will the stock fall to fill gap 5 at $340.80 or will the stock price rise to the target suggested by the triangle pattern?

Figure 3. Omnitrader Chart Suggesting A Buy. This chart suggests that for the short-term gap 5 will not be filled.

Graphic provided by: Omnitrader.

The chart in Figure 3 is an Omnitrader chart with a buy signal given on the Vote line based on three strategies shown in green below the Vote line. Looking back at the previous buy signals, they have all been successful. The chart in Figure 3 suggests that for the short-term, the price of AMZN will not fall to fill gap 5. In fact, with the news that keeps coming out about AMZN's fundamentals it looks like the share price may not fall at all to fill gap 5. Buying AMZN at the current price looks like a good bet.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.