Amazon – Set up for a big move higher?

Amazon (AMZN) gave a big, fat buy signal back in late January when it crossed above both the 30 week moving average and the blue downtrend resistance line as noted in my chart below. Since bouncing off the bottom (for the third time just prior to the breakout), it has risen a cool 33% in a month and has since been consolidating sideways creating a high and tight bull flag.  I view these patterns are usually ½ way markers allowing the bulls to catch their breath and unwind overbought conditions.  Which is exactly what is happening now. Also note in the bottom pane of the chart you can see the ratio of Amazon to the SP 500 has turned up from a period of deep under-performance to one of outclassing the index.

Switching to a daily chart and looking at the highlighted consolidation (flag) you can see it is currently on its 3rd touch of the upper and lower boundaries of the box. This is telling me it is not ready to break out quite yet. To be a proper flag I expect to see least 5 or 6 touches (it can be more).  An even number of touches indicates it is a reversal pattern as the flag broke out to the downside and an odd number means it is a continuation pattern breaking higher. Both indicators are set up positively as the upper RSI has unwound its overbought condition and is pointing higher while the MACD in the lower panel is above zero and has just crossed above its signal line.

It seems like AMZN is nicely setup for a move higher.  If the market pushes higher and AMZN follows suit, the target for this pattern is ~470, which is about 90 point (or 25%) higher. AMZN is one of dozens of stocks whose charts are pointing to much higher prices in our future once this consolidation period is behind us.

A Quick Round Trip

Back on 2-18-15 I wrote a post on JC Penny’s stock, JCP, proclaiming the virtues of what the charts were saying.  Here we are 7 weeks later, I am back at you with a recommendation to sell the stock (at least ½ if not the entire position), as I did today.  After a 12% while the SP500 was down fractionally during the same period, locking in some profits seems prudent right here. 

At the time of my initial post here, an inverse head and shoulders pattern had set up and projected an upside target of almost 40%.  That target combined with its risk/reward was so compelling it was one I couldn’t pass up on.  Those that remember this post may be wondering why, if the target was almost 40% higher, would I be selling now only after a 12% gain.   Below is a chart I posted at the time.

Below is the same chart 7 weeks later. Notice how price spike immediately higher after my post and was rejected at the first grey resistance line around $9.25. Once hitting that, It corrected lower, in fact, falling below my entry point and back down almost to the right shoulder.  At the time I really thought I would be eating crow. Thankfully, my stop placement just below the right shoulder worked out perfectly as it was not hit and price immediately pushed higher back up to the grey resistance line today where it was, once again, rejected.  This tells me this price level is hot and must be respected and as such I expect further consolidation and likely more downside from here. It does not mean it cannot eventually reach my projected 11.25 ish target price but, the pattern that made it such an attractive investment has been invalidated. So taking partial, if not all profits, is warranted.

I am circling back around to this post not only because it turned out to be a nice investment gain (an 89% annualized return is nothing to sneeze at), albeit a short holding period, it also turned out to be a great learning tool. Here is what you should take away from this example.

1.       When investing make sure you clear your mind of biases and opinions. They can be very detrimental to making profits.  Before this recommendation who really thought this investment, JC Penny’s, was going to outperform (and in this case massively so) the index?  If you reread my post I had my doubts but what I have learned is to let those thoughts go and follow the charts (price)

2.       Have a plan before you invest.  You aren’t always going to be right so know what price level that is and make sure you incorporate that into an exit strategy that is established BEFORE you invest.  If you are going to take a loss (and losses are a part of investing) keep the size of each loss small.

3.       Taking profits on a portion of your position, once it hits your first level of resistance (these, like your loss exit point should be determined in your investment plan before you invest) and then adjusting your stops accordingly on the remainder will guarantee you can NEVER lose money on that investment. This is good risk management and should be considered on every investment. Sure, it doubles your transaction costs, but the cost of a transaction is so small as compared to most investment losses (even those with a plan), it is a practice all investors should follow.

No Foolin'

It was almost 2 years ago I wrote about a developing rising wedge in the SP500 which had potentially bearish implications. As it so happens the bearish breakdown never happened and we continued to push higher. As it turns out, and for all the negative references analysts use to support their arguments as to why prices are going to fall, rising wedges have very poor predictive success. In fact they have one of the worst performance rankings, 20th out of 21 when looking at all patterns.

Fast forward to today and sure enough you can see in the chart below, the SP500 is sporting another rising wedge. The most disconcerting thing about this wedge is the projected target if it were to play out. About 12% lower than from where we closed out Q1. 

For these patterns that actually do breakdown, less than a 50% meet their target price objective (measured move). If you stop and think about it that makes sense because rising wedges typically occur in uptrends, in this case a very strong uptrend. Corrections in strong uptrends are characteristically short and shallow.

So while I don’t want to discount the pattern just because of its low probability, it is helpful to understand target support levels if we do see a breakdown … just in case this one is real. If price breaks the lower blue support line, the next level of support would be just below at the red horizontal price labeled S1, around 2040.  A break below that would find support at S1 around 1990 and finally if that does not hold, I would expect this to be one that falls all the way down to its measured move near 1820.

While I am not predicting a correction, this pattern has my attention. And until this pattern is resolved it is, at a minimum, a warning flag telling me it is not a time to be a hero and put more money into a long (US stock market) equity trade. Of course, things can change very quickly but looking at the bigger picture, there is nothing that is saying this bull market run is over rather we are in the middle of period consolidation in a longer term uptrend.

Have a great rest of the week