AMZN: A whipsaw waiting to happen

Update 3/14/2014: AMZN closed above its 20-day price channel on March 5 and confirmed the exit signal the next day. I held no position but have removed AMZN from my Watchlist as a potential bear play.

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The gigantic online retailer Amazon.com Inc. (AMZN) broke above its 20-day price channel on Wednesday, March 5, and confirmed the bull signal the next day by trading still higher.

AMZN has been in an uptrend since Aug. 11, 2006, from $25.76. The most recent leg up began Nov. 15, 2012, from $218.18, and peaked Jan. 22 at $408.06.

From that high, the price subsequently declined to $337.73 on Feb. 5.

AMZN's bull signal is a whipsaw waiting to happen. The chart shows another leg to the downside ahead for AMZN before the price resumes its upward march to levels exceeding the January peak.

The Chart

AMZN's chart as an analytical problem breaks down into two parts: What is the nature of the decline since January, and is there upside potential afterward?

To the first question, Elliott wave analysis answers that AMZN is in the midst of a 4th-wave correction to the downside -- wave 4 {-1} -- and is tracing an A wave, the first of three components within the 4th.

Click on chart to enlarge.

AMZN 10 years weekly bars (left), 2 months hourly bars (right

The A wave itself breaks into five waves, and I see the March 6 peak of $375.33, which triggered the bull signal, as being the the end of wave 4 {-3} within A {-2}. That's the whipsaw waiting in the wings. If wave 4 {-3} has indeed peaked, then the next move will be to the downside, despite the price channel bull signal.

If the 4th wave turns out to be a zig-zag pattern, it will carry the price below the Feb. 5 low of $337.73. If it is a flat pattern or a triangle, then it may well stay above that level.

All of this means that there is more downside potential over the shorter term than upside.

The broader wave 4 {-1} remains in a downward A wave, which will see a B wave recovery before a C wave brings it back down.

I have no way in Elliott to set targets for the B wave recovery -- B {-2}. If it is proportional to the present wave A {-2}, then it will take months to do its work, likely giving AMZN a sucker rally in the summer, and it will be followed by a downward rout, wave C {-2}.

At the {-1} degree, AMZN is in a downward correction, not a downtrend, and corrections tend to carry more risk than do trends.

Longer term, the end of wave 4 {-1} will set up a final push to the upside within wave 3, which began in December 2011. That push, wave 5 {-1} will carry AMZN above the Jan. 22 high.

Decision for My Account

AMZN is not a good candidate for a bull play at this point, and I won't be opening a position. I shall keep AMZN on my Watchlist as a potential bear play.

References

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.

Disclaimer

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.