Amazon.com, Inc. (AMZN) fell through the $3,000 level for the first time since Sept. 25 on Monday, just two days after investors sold a blowout third quarter earnings report in which the e-commerce giant beat top- and bottom-line estimates by wide margins. The bearish reaction matched steep declines after other big tech reports, highlighting outsized 2020 returns and the overriding importance of Tuesday's presidential election.

Key Takeaways

  • Amazon stock has posted a return in excess of 60% so far in 2020.
  • The company faces elevated risk under the next presidential administration.
  • The stock topped out and entered an intermediate correction in July.
  • Price action could complete a bearish head and shoulders topping pattern.

The stock has gained 62% so far in 2020, and that's after the two-day decline, underpinned by market share gains and windfall profits as a result of the COVID-19 pandemic. However, it topped out more than two months ago and entered an intermediate correction that now threatens to complete the last leg of a head and shoulders top. The neckline at $2,850 marks the dividing line in this configuration, telling bulls that they need to defend the $3,000 level at all costs.

Company fortunes may depend on the presidential election because CEO Jeff Bezos also owns The Washington Post, which President Donald Trump has repeatedly accused of disseminating "fake news." A Biden administration could be even tougher, ushering in an antitrust era seeking to remedy the destruction of small business by tech mega caps. It's even possible that the winner of this week's contest will succeed in breaking up a few household names before the dust settles.

Wall Street consensus on Amazon stock is lopsided despite historic returns, with a "Strong Buy" rating based upon 34 "Buy" and just 1 "Hold" recommendation. No analysts are recommending that shareholders close positions and move to the sidelines. Price targets currently range from a low of $3,048 to a Street-high $4,500, while the stock is set to open Tuesday's session about $20 below the low target. This disconnect with price action suggests that analysts need to rethink Amazon's long-term outlook.

Antitrust laws are statutes developed by the U.S. government to protect consumers from predatory business practices. They ensure that fair competition exists in an open-market economy. These laws have evolved along with the market, vigilantly guarding against would-be monopolies and disruptions to the productive ebb and flow of competition.

Amazon Daily Chart (2017 – 2020)

Daily chart showing the share price performance of Amazon.com, Inc. (AMZN)
TradingView.com

The stock broke out above the 1999 high at $110.63 in 2009 and entered a rising channel that contained price action into a breakout in the first quarter of 2018. It topped out at $1,942 about six months later and eased into a trading range with support near the $1,300 level. July 2019 and February 2020 breakout attempts failed, while the first quarter's pandemic decline carved a higher long-term low.

A bounce into the second quarter completed a V-shaped pattern, giving way to an April breakout that tested new support for two months before ejecting into a strong advance. The rally stalled above $3,300 in July, yielding a quick decline through $2,900, followed by a final buying spike to an all-time high at $3,552 on Sept. 2. The stock fell to the July low a few weeks later, carving the next point in the neckline, while a bounce into October reversed just above the early-July peak.

A selloff to $2,800 would now complete the head and shoulders top, raising the odds for a breakdown that establishes a measured move target near the April breakout at $2,175. Ominously, the on-balance volume (OBV) accumulation-distribution indicator is carving an identical head and shoulders, with a breakdown ahead of price setting off an early sell signal. Conversely, a buying surge above the October high at $3,496 is now needed to negate this bearish pattern.

A head and shoulders pattern is a chart formation that appears as a baseline with three peaks – the outside two are close in height, and the middle is highest. In technical analysis, a head and shoulders pattern describes a specific chart formation that predicts a bullish-to-bearish trend reversal.

The Bottom Line

Amazon sold off despite beating third quarter earnings estimates by wide margins and could complete a bearish head and shoulders top in coming weeks.

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