Amazon Stock (NASDAQ:AMZN)
Despite repeated breakout attempts and a rise in the key sectors, Amazon.com, Inc. (NASDAQ:AMZN) has been unable to break out of its downtrend and catch up to its most crucial benchmark. Because of the technical factors mentioned in this post, I continue to classify Amazon stock as a high-risk hold position. I still would recommend something other than getting into or expanding your exposure to the company.
A Glance at the Overall Picture
After a year of severe sell-off that damaged practically all businesses throughout the sector, the technology sector in the United States has led the current rebound in the US stock market since the beginning of 2023. The semiconductor industry has been at the forefront of the sharp turnaround, while IT service providers have been slow to gain traction. While most relevant industries have participated in the recent reversal, the auto manufacturing industry has been at the forefront of the rally, benefiting greatly from the easing of global supply chain bottlenecks, while online retailers are only slowly recouping from their massive losses of the past year.
Despite being unusually stretched off the recent low, the Consumer Discretionary Select Sector SPDR ETF (XLY), a widely used benchmark for the sector, is still trending downwards. In addition to displaying relative weakness compared to the larger technology market represented by the Nasdaq Composite (IXIC) and the Nasdaq-100 as monitored by the Invesco QQQ ETF, the benchmark is now attempting a third break out from its EMA55 (QQQ). Although XLY has been on an upswing as of late, it will still require much more confidence from buyers and sustained relative strength to break out of its downtrend and into a new uptrend. In addition, the benchmark is in danger of going below its EMA200, which might cause XLY to retest its low point set on December 28, 2022.
Where Do We Stand Right Now?
My analysis of Amazon’s fundamentals and valuation under three different scenarios was published in my article “Apple vs. Amazon: Which FAANG Stock Is The Better Investment?” on November 24, 2022. According to my findings, Amazon stock is still overvalued at $75.36 a share in the most optimistic scenario. AMZN hit a new low of $81.43 on January 6, 2023, and the stock may stage a short-term rally that will ultimately lead to a test of the EMA200 on February 2. This is the third time this situation has occurred since the beginning of the stock’s decline; however, unlike the previous two times, the breakout attempt did not occur simultaneously at the EMA55 on the stock’s weekly chart.
Although there were a few accumulation days in the recent few weeks, the stock’s bullish momentum seems to have been fleeting, as the market index is still highly adversely stretched and shows enormous relative weakness compared to the Nasdaq Composite (IXIC). Despite the current surge due to a negative extension, AMZN will need to build up considerable relative strength for a sustained reversal. This should also be represented in the XLY, given that the company’s weight is over 24% of the benchmark’s holdings.
Each effort at a breakout has been met with an equally large-scale rejection, reversing the epidemic lows. Stage four is when a company like AMZN faces significant technical and psychological resistance that must be broken through before a new upswing can begin.
What Happens Next?
AMZN is approaching the EMA55 on the daily chart, indicating that it is testing support. The stock is continuing to track its downtrend channel. The rejection at the EMA200 was marked by significant sell-side volume, suggesting that institutional investors have been taking gains but still lack the confidence to propel the stock price upward. Short interest in Amazon stock has been falling from its September 15, 2021, high of $19 billion in volume sold short to January 20, 2023, low of roughly $6.7 billion, but this has yet to improve the stock’s resiliency.
This company has technically failed to create an Elliott Wave since wave 4 has moved into territory that belongs to wave 1. This suggests that the price will likely continue slowing once the final wave ends. In addition to having broken below its most important support levels, the stock has been repeatedly rejected by its moving averages as its following resistances, so any potential reversal would have a high bar to clear.
AMZN could continue tracing the upper part of its downward channel, the MACD just crossed negatively, and the stock is again set for a buildup in relative weakness. At the same time, the buy-side volume has significantly declined from the recent peak, all of which point to a higher probability of further AMZN declines. AMZN’s EMA55 is the next key indicator to watch. If AMZN drops below this support level, I would not be surprised to see the company retest its low of $81.43. However, based on the real technicals, I would set my most pessimistic objective at about $73.30, which is near my fundamental value target of $75.36.
If AMZN proves more robust and the EMA55 becomes its new support level, the company may push prices higher into the EMA200 in the weeks ahead, with $115 being the most probable goal. For me to seriously consider AMZN for a long-term buy position, I would need to see the stock break out from its EMA200 on the daily chart and its EMA55 on the weekly chart while simultaneously confirming those price levels on substantial volume and consistently reporting significant relative strength.
I see AMZN as a high-risk hold due to the current adverse circumstance, where the risk/reward ratio is just 0.56. There is a better moment to start or increase one’s holdings in AMZN. The company is now in a phase that no investor wants to see except on the short side, as I have previously emphasized using technical and fundamental considerations. Shareholders with a low-risk tolerance may monitor the price activity below the EMA55 before deciding where to stop the loss. Some investors may be willing to give the stock more time, but I would not want to see it test its bottom and would set my stop loss around $90.
If AMZN keeps trending sideways, it may enter stage one and consolidate until it attracts enough buying interest to gain momentum and break out over the formidable ceiling of resistance. Long-term investors who have suffered a huge loss may sell their shares of stock as soon as they reach their break-even point or any price that looks like a reasonable trade-off to them, even though the bottoming process can take a long time. From a shorter time frame, this might result in an intriguing trading range; nevertheless, I would need to see confirmation of a bottom and the accumulation of bullish momentum before adopting a swing-trade position.
Conclusion
Although it is not a failsafe, technical analysis may help investors improve their odds of making money and provide a sense of direction in any investment. Only ventures out on the road after first checking a map or utilizing a global positioning system (GPS). When picking stocks, I think the same logic should apply. For this, I validate the probability of a result depending on time by using Elliott Wave Theory methodologies and Fibonacci’s principles. By looking at the company’s sector, industry, and, most importantly, price activity, my technical analysis helps me decide whether or not to enter the stock at a certain price. In the next step, I apply the abovementioned ideas to the specific stock’s circumstances and derive potential outcomes.
Other industries are leading the charge in the related upswing, while online shopping and IT are still trying to gain traction. The cyclical and structural economic challenges are putting downward pressure on the values of companies in these two sectors. Some former market leaders fall from grace during bear markets, while others battle to regain their footing and new market leaders emerge. Amazon stock is still battling to recover from its recent decline, and the stock may be headed for more losses; nonetheless, the company’s upside potential is still too low to warrant a purchase. If the stock price can indicate a new increase, there is a better time for investors to become involved with the business. Based on the aforementioned technical considerations, I would not add any fresh exposure to AMZN and would continue to rate the stock as a high-risk hold.
Featured Image: Unsplash @ Christian Wiediger
