Amazon Stock on the Defensive After Mixed Guidance

Amazon.com, Inc. (AMZN) is trading sharply lower in Friday's pre-market after missing first quarter 2020 profit estimates by a wide margin. The company earned $5.01 per share during the quarter, while revenues rose 26.4% year over year to $75.74 billion, beating $74.15 billion guidance. Amazon issued in-line second quarter guidance but warned that operating income will drop sharply because COVID-19 related costs are expected to rise from $600 million in the first quarter to over $4 billion.

Demand for essential goods surged in early March when the pandemic shutdown forced customers to stay at home, catching the retail giant off-guard. Warehouse capacity was expanded at a rapid pace to deal with the order flow, at the expense of discretionary goods, which saw a sales decrease over the same period. Grocery volume through the wholly owned Whole Foods increased substantially as well, also raising operating costs.

The second quarter investment has a dark side because bankruptcies are increasing throughout the retail space, reducing alternatives to Amazon and other e-commerce portals. The company will pick up market share as a result of those closed storefronts, increasing its stranglehold on an industry that thrives through competition. This domination could reactivate worldwide investigations into monopolistic practices and eventually provoke regulatory action.

The stock broke out to a new high in mid-April after mounting February resistance at $2,185. The overnight sell-off has settled around $2,350, within a two-week trading range between Thursday's all-time high at $2,475 and the April 21 low at $2,280. A range breakdown in coming session would initiate a critical test at the top of the breakout, potentially triggering a pattern failure that sets off major sell signals.

AMZN Long-Term Chart (1999 – 2020)

A vertical uptrend topped out above $110 in 1999, yielding a failed 2000 breakout attempt, followed by a steep decline that ended in the single digits after the Sept. 11 attacks in 2001. A two-legged recovery wave topped out within 12 points of the prior peak in 2007, giving way to a sell-off that held well above the 2001 and 2006 lows. That resilience attracted buying interest into the new decade, completing a historic breakout that eased quickly into a rising channel pattern.

The rally entered a more vertical trajectory in 2016, generating a 2018 channel breakout and buying spike that ended at $2,050 in September. It sold off more than 700 points into year end and turned higher into 2019, stalling within 14 points of resistance in July. The stock cleared the 2018 and 2019 highs in February 2020, but the breakout failed immediately, ahead of a steep downdraft that got bought aggressively in the second half of March.

AMZN Short-Term Chart (2018 – 2020)

The bounce completed a round trip into the February high on April 13, yielding an immediate breakout and rally that posted an all-time high this week. The red line at $2,185 now marks the first major support level during a pullback, with a violation generating a failed breakout. The black line at $2,050 marks the longer-term interface between bull and bear power, with a breakdown potentially ending the multi-year uptrend.

The on-balance volume (OBV) accumulation-distribution indicator highlights broad strength, breaking out with price to an all-time high in April. Watch OBV closely if bears maintain control in the next few session because a breakdown through the red line could precede a price violation, offering an early warning signal to take appropriate action. Even so, bulls are fully in control right now, raising the odds that the stock will recover quickly from this morning's sell-the-news reaction.

The Bottom Line

Amazon stock is trading lower by about 5% on Friday after a mixed first quarter earnings report and warning about second quarter operating costs.

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