Has Amazon Stock Topped Out?

Amazon.com, Inc. (AMZN) posted a bearish outside day on Thursday, dropping off an all-time high at $1,763.10. Higher-than-average selling volume predicts even lower prices or a consolidation pattern in coming weeks, following an impressive rally that has added 125 points since a breakout above two-month resistance at $1,630. Top-pickers will be watching short-term price action closely, looking for signs that the latest trend advance has run its course.

The internet juggernaut and tech sector have provided a safe haven for capital exiting stocks vulnerable to a trade war, but the positioning may be misplaced. The administration's efforts to end Chinese intellectual property theft could draw tech stocks into the firing line, ending the Nasdaq 100's breakout to an all-time high. Amazon already faces headwinds from tariff-tainted margins and could run into additional roadblocks with its China-based operations. (See also: Amazon Prime Adoption in US May Have Peaked: RBC.)

It will probably take months or longer after the final rally high to proclaim a long-term top or new downtrend in Amazon shares, but we can apply two technical methods to gauge risk vs. reward of new positions. The first technique uses a simple measured move calculation, examining the prior consolidation pattern, while the second applies a Fibonacci extension to locate hidden harmonic resistance.

Method #1 - Measured Move

The stock broke the top of a six-year rising channel in January 2018, establishing support that has now centered near $1,350. That level also marks the swing low of a two-month cup and handle pattern formed after the stock turned lower above $1,600 on March 13. Technicians project potential upside targets after cup and handle breakouts by taking the depth of the cup and adding it to new support at the breakout level.

The decline into April posted 264 downside points ($1,617 – $1,353 = $264), and adding this number to the March high yields $1,881, or 120 points above Thursday's all-time high. In turn, that predicts the current rally wave is just halfway over. Of course, uptrends rarely unfold in a straight line, so it's possible that the stock will pull back and test new support before gathering the buying power needed to challenge the measured move target. (For more, see: Tech Giants Challenge Amazon in June.)

Method #2 - Fibonacci Extension

Market technicians can identify harmonic turning points through Fibonacci extensions, which use the same price swings as the measured move method to project a rally's potential strength. The initial high forms the first point in this process, while the swing low generates the second point. Ratios of this number are then constructed on top of breakout support to find hidden resistance levels.

The cup and handle breakout generated a six-day rally that stalled at the .382 Fibonacci extension on June 6. The stock pulled back for three sessions and turned higher, rallying through that level on June 14. It reversed again at the .50 extension, which marks a common price zone for a pullback or consolidation lasting several weeks or longer. Interim harmonic barriers at $1,781 and $1,825 could slow or the end the upside, but the rally may reach the 1.000 extension, which always matches the measured move target.

Strong uptrends often exceed the 1.000 barrier, reaching the 1.618 extension, which marks major resistance. That level has aligned within 43 points of psychological resistance at $2,000, marking a ceiling that may not be breached for months or years.  Looking back, the stock crossed $1,000 for the first time in July 2017 and mounted that level three months later, but price action may not be as supportive this time around, with trade wars on the horizon.

The Bottom Line

Amazon shares reversed on Thursday and could pull back for several weeks, but the current uptrend may not have run its course. (For additional reading, check out: Why Amazon Could Cause a Market Meltdown.)

<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>