Monday, December 23, 2013

AMZN: A mature trend

Update 2/4/2014: AMZN pushed below its 20-day price channel on Jan. 31 and continued below that level for two subsequent trading days. I'm removing AMZN from my Watchlist as a potential bull play. AMZN never met my criteria for entry and so I didn't open a bull position.

Click on chart to enlarge.
AMZN 90 days 1-hour bars Inc. (AMZN) has set a high so far today of $405 after sending a bull signal on Friday. It has come a long way since it started trading on the stock exchanges.

The stock's rise began from May 22, 1997 at $1.31. By the Elliott wave count, it is now within wave 3 {+4} of that rise, and also within wave 3 {+3} and wave 3 {+2} at two lesser degrees.

The present {+1} degree began from $34.68 on Nov. 20, 2008 and is in its 5th wave, near the end of its run.

That's a short way of saying that in the markets, all trends come to an end, and by the count, such is the case with AMZN's, where the lesser degrees below wave 5 {+1} are also in their fifth waves down to wave 5 {-1}.

Click on chart to enlarge.
AMZN 2 years daily bars (left), 4 months 4 days hourly bars (right)
I'm decidedly NOT saying that AMZN isn't a trade for me at this point. Fifth waves can take a very long time to work themselves out, and I only need a month or so to make a profit.

The {-2} degree is the one to watch. At that degree, AMZN is wave 3 {-2}, which began Aug. 28 from $279.33. It, too, is coming to a close, via wave 5 {-3} and wave 5 {-4}. Once they are complete, then wave 4 {-2} will correct the rise from August, to be followed by a rise from the correction low to above the wave 3 {-2} high, presently at $405.

The questions, then, are how high can wave 3 {-2} go, and how long a lifespan is typical at this degree.

At this point, wave 3 {-2} is already longer than wave wave 1 {-2}, so it cannot violate the Elliott wave rule forbidding a third wave from being shorter than both the first and fifth waves. It can stop now, or continue on its upward path.

The same holds true for the enclosed waves at the {-3} and {-4} level. There is no limit on the lower degree uptrending fifth waves now underway on this chart.

Wave 1 {-2} took about three months to complete. The present wave 3 {-2} has been in progress for about four months. The calendar argues against a longer rise if the waves are proportional. However, there is no rule that requires them to be, and fifth waves are often extended in time.

The cautious trader, with a farther horizon, will wait for the wave 4 {-2} correction before opening a position. For a trader with my comfort with risk and nearer horizon, there is nothing in this chart that would forestall a bull play.

This is AMZN's third bull signal since wave 3 {-2} began on Aug. 28. Both were profitable, yielding on average 8.5% over 29 days.

I chose AMZN for analysis out of Friday's signals because it is a household name and highly liquid. Both qualities are pluses in constructing a position. (See "Monday's Prospects" for a listing of all bull and bear signals from Friday.)

Most were confirmed in trading today. One, VFC, has a 4:1 stock split. It gets sent to the back of the queue until my brokerage either adjusts the charts to compensate or the passage of 20 days again gives me price channels I can use.

I loathe stock splits when I'm analyzing, and love them when a high priced, awkward stock gains some granularity. AMZN belongs in the high-priced, awkward category.

Amazon needs little explanation. From its Seattle, Washington, headquarters, it runs a global e-commerce empire that has become a ubiquitous presence in households that are comfortable with online shopping. It started with books. It now sells practically everything.

Analysts are optimistic about Amazon's future prospects, collectively coming down at a 38% enthusiasm rating.

Return on equity is slim, a mere 1.5%, and debt is actually at a level that I consider to be high in comparison with return, at 33% of equity.

Amazon has reported losses in the last two quarters, and also in the third quarter of 2012. The remaining quarters of the last three years were profitable. Each of the 2013 quarters reported so far has come in below its year-ago counterpart.

Earnings have surprised to the downside seven times in the past 12 quarters, and to the upside five times.

AMZN's earnings yield is 0.07%, lower than all other catalog and mail-order retailers. The stock is priced at 1,425 (!) times earnings and also at a premium to sales. It takes $2.62 in shares to control a dollar in sales.

At this point, even though I don't normally trade based on the fundamentals, I have to sit back and take a deep breath. These numbers are slightly ridiculous. What's really going on here?

Amazon pays no dividend, so all earnings are retained within the company. Analysts are clearly anticipating that the money is being spent wisely to help Amazon grow. That's straight out of the Warren Buffett playbook.

Also, the company is a behemouth. Analysts have to be assuming that there is room for future market penetration. As I watch another fast grower, Apple (AAPL), struggle with a mature, saturated market, I wonder how much more market there is for Amazon.

Those are questions; I have no answers. I'm a chart trader. The numbers give me pause and counsel caution.

AMZN on average trades 2.9 million shares a day and supports an awesome selection of option strike prices spaced $5 apart. The front-month at-the-money bid/ask spread on calls is a narrow 2.1%.

Implied volatility stands at 31%, the high point of the month. It has been on the rise from 27% since Dec. 13.

Options are pricing in confidence that 68.2% of shares will fall between $365.39 and $438.41 over the next month, for a potential gain or loss of 9.1%, and between $384.36 and $419.44 over the next week.

Contracts are trading actively today, with calls running at 66% above their five-day average volume and puts at 46% above average. next publishes earnings on Jan. 29.

Decision for my account: The chart allows for a bull trade, although the trend is fairly mature. The financials, as I said above, counsel caution. If this were a normal week, I would open a bull position in AMZN. Since it's Christmas week, when volumes are lower, I'm putting off any trades and adding AMZN to my Watchlist. I'll come back to it on Jan. 2 and see what it has done.


My shorter-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

I use the number 68.2% in using applied volatility to calculate the expected trading range. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.

Elliott wave analysis tracks patterns in price movements. The principal practitioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading

Several web sites summarize Elliott wave theory, among them, Investopedia, StockCharts and Wikipedia.

See my post "Chart Analysis: Nomenclature" for an explanation of my method for labeling waves on the chart.

By preference I place my trades in the last half hour before the closing bell in New York. See my essay "When is the best time to trade" for a discussion of the practice.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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