Tim Bovee, Private Trader: AMZN: The bear skulks, but doesn't attack

Amazon.com Inc. (AMZN) is a household name, the giant online retailer that has reinvented the book business and is in the process of reinventing other sectors as well.

Headquartered in Seattle, Washington, AMZN is famous for being a long-term player that worries less about next quarters bottom line and more about growing the company and, not to be too grandiose, reinventing the world.

Sometimes this approach results in trader angst, as market players ask, "When do we get ours?"

AMZN, like many innovative players, saw a huge run up in the wake of the Great Recession recovery. But since January its share price has stumbled. The chart is bearish at first glance, but deeper analysis shows greater potential to the upside than to the downside. Is the bear roaring at Amazon's door? Elliott wave analysis suggests that although the beast may be skulking about, it is not yet ready to launch an attack.

The Chart

Elliott wave analysis shows that AMZN's peak on Jan. 22 completed wave 3 up from Dec. 29, 2011.

The next step for the stock will be a decline that will correct a portion of wave 3, which ran from $166.67 up to $408.06.

Click on chart to enlarge.

AMZN 17 year monthly bars (left), 9 months daily bars (right)

Wave 1 {-2} to the downside, which ended on May 9 at $258.68, slightly pierced the 50% Fibonacci retracement level at $287.37 on its ending day, and subsequently bounced back to the upside in wave 2 {-2}, continuing the correction.

The earnings announcement gap to the downside suggests that wave B {-2} to the downside began from the wave A {-2} peak of $364.85 on July 24.

Since it is wave 3 in the base degree that is being corrected, the scope of that degree in the previous rise is important to understanding what has happened after the peak.

The correction is a 4th wave correction within an uptrend, a wave position that typically comes in on the shallow side.

Wave 1 covered 140.91 points over one year and three months. Wave 3, typically the longest of the trend, covered 241 points over two years plus change.

So, ballpark, I would expect wave 2 to run into the summer of 2015, and perhaps into the autumn. The components at the {-1} degree (an A, B and C wave, and perhaps an extension multiple A-B-C sets) can be expected to last for several months each.

A typical single set of A-B-C might break into five waves to the downside at the {-2} degree, three waves to the upside, and then five waves to the downside.

So, as a you are here, wave B {-3} to the downside, currently underway, part of an upward correction, wave 2 {-2}, within the first wave of a downward correction, wave A {-1}, which is in turn a component of wave 4, a downward correction.

It is true that wave B {-3} is moving to the downside, a bearish occurrence, but I consider it likley to stay above $284.38 and to reverse within weeks in a strong wave C {-3} to the upside that will move above the $364.85 level.

That's a maximum 8% potential to the downside, vs. a maximum potential of 16% to the upside.

There's no way of telling how it will play out in reality, but the numbers suggest that this chart is more bullish than bearish.

Decision for My Account

At this point I can make a decision about opening a bear position on AMZN, based on my Elliott wave analysis. The chart is bearish, and chances are good that a new bear position will see a reversal, or even a whipsaw, before it can make much profit. Far better to wait until wave C {-3} peaks and reverses.

I don't intend to open a bear position in AMZN at this point.

-- Tim Bovee, Fukuoka, Japan, Aug. 3, 2014 New York time

References

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

From time to time 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 shorter-term 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 decisions for his or her own account, and take responsibility for the consequences.