Amazon.com, Inc (AMZN) could not close above its 200-day simple moving average at $1,703.90 on Dec. 12 as a "death cross" formed on its daily chart. This warning led to a decline to its semiannual pivot of $1,546.97, which had been a magnet since Oct. 29. Failure to hold this key level on Dec. 19 increased the downside to as low as $1,307.00 on Christmas Eve. This crash put the stock into bear market territory at 34.5% below its all-time intraday high of $2050.50 set on Sept.4.
Once a stock loses its momentum status, it's hard to find new buyers, as the P/E ratio is elevated at 84.77 and the company does not offer a dividend. The formation of the "death cross" resulted when the 50-day simple moving average declined below the 200-day simple moving average, signaling that lower prices would follow, and indeed they did.
Amazon has been beating earnings per share estimates in each of its prior five quarters, but its earnings report for the fourth quarter of 2018 will not be released until Jan. 24. Given the expectation of EPS of $5.48 per share, there should be a tradeable bounce before this report. The dilemma is the downside risk before a bear market rebound occurs.
I have been calling the stock the "United States of Amazon," as it has products and services for almost all segments of our consumer needs. Without technical momentum, the focus becomes the costs associated with setting up new business centers, the expected increase in delivery costs from the U.S. Postal Service, building its own delivery operations to compete with FedEx Corporation (FDX) and United Parcel Service, Inc. (UPS), and the expansion of sales taxes.
While revenue growth should continue, the costs of expansion will become the earnings focus. Amazon Web Services will remain the global cloud computing leader. Advertising dollars should continue to rise. Consumers enjoy shopping at Whole Foods supermarkets, and Amazon Prime memberships should continue to grow.
The daily chart for Amazon
The daily chart for Amazon shows that the stock began 2018 on a strong momentum run that did not stall until the stock set its all-time intraday high of $2,050.50 on Sept. 4. Once that occurred, the key level to hold was the horizontal line at $1,804.53, which was my quarterly pivot. This level was a magnet between Oct. 10 and Oct. 27, but it then failed to hold.
The downside became the horizontal line at $1,546.97, which was my semiannual pivot. This level provided a buying opportunity between Oct. 29 and Nov. 26, but strength could not rise back to $1,804.53. This led to the confirmation of the "death cross" on Dec. 12. Once the horizontal line at $1,546.97 failed to hold on Dec. 19, the downside accelerated. Failure to hold my semiannual pivot at $1,546.97 led to the weakness into the low of $1,307.00 set on Christmas Eve.
The weekly chart for Amazon
The weekly chart for Amazon is negative, with the stock below its five-week modified moving average of $1,553.20. This indicates risk to the 200-week simple moving average, or "reversion to the mean," at $970.61 at some point in 2019. The 12 x 3 x 3 weekly slow stochastic reading is projected to decline to 22.71 this week, down from 28.01 on Dec. 21.
Investors should buy Amazon shares on weakness to the 200-week simple moving average at $970.61 and reduce holdings on strength to my semiannual pivot at $1,546.97.
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.