Chart Of The Day: Amazon Technicals Bearish For Stock Despite Strong Fundamentals

  • Stock Market Analysis
  • Editors Pick

Shares of e-tail powerhouse Amazon (NASDAQ: AMZN ) dropped 5.6% on Monday, closing at $2,749, even after analysts at global investment bank J.P. Morgan characterized the stock as their "top internet idea." 

It's easy to lay the immediate blame on the broader market selloff sparked by fears of an escalation of hostilities related to Russia's invasion of Ukraine, in tandem with already surging commodity prices that have spiked higher since the incursion.

However, notwithstanding JPM's top internet idea hat tip, ongoing supply chain issues, which have been in play since COVID restrictions were first imposed in 2020, have directly impacted Amazon sales. A look through the site is sufficient to understand how serious the issue is—myriad pages feature messages saying the item listed is out of stock with no future availability date forecast.

Plus, we've discussed previously that consumers have had their fill of online shopping after the lengthy stay-at-home period that's just passed and are eager to get back into the real world, shifting spending to outdoor activities, entertainment, and travel, and if they're shopping at all, to brick-and-mortar retailers.

From a fundamental perspective though, the latter development shouldn't really be a significant catalyst for the stock's decline. The Seattle, Washington-based company relies less and less on retail sales to grow profitability.

Amazon's web service cloud business, AWS, brought in $18.5 billion of its operating profits in the past year, or 74% of the company's earnings . That's almost three times as much as the contribution to the bottom line from its e-commerce business.

Nevertheless, shares of AMZN have been slumping since its July 8th, $3731.41 record price. As of Monday's close, the stock is 26.35% lower, well within a bear market, which is measured by just a 20% decline. What's more, AMZN's technicals are signaling it's likely to fall much further.

AMZN Daily

Yesterday, the stock completed a symmetrical triangle, bearish after the preceding plunge. That tumble was itself a downside breakout of what appears to be a top. The pattern's implied target is $2,250.

Trading Strategies

Conservative traders should wait for the price to close below the $2,700 level and remain below the triangle for at least three days, then wait for a rebound to reduce exposure before risking a short position.

Moderate traders would short once the price spent at least two sessions below the pattern and entered a corrective rally to enter closer to the resistance.

Aggressive traders could short at will, given they have a trading plan that meets their timing, budget, and temperament. Here is a generic sample:

Trade Sample – Aggressive Short:

  • Entry: $2,800
  • Stop-Loss: $2,900
  • Risk: $100
  • Target: $2,300
  • Reward: $500
  • Risk-Reward Ratio: 1:5

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