Amazon Stock's Correction May Be Coming to an End

Amazon.com, Inc. (AMZN) stock has struggled since July, dumping more than 17% before easing into a prolonged test at the $1,700 level. Fortunately for shareholders, the correction has continued through time but not price, stubbornly holding support while relative strength readings near oversold levels. Accumulation readings have stopped falling during this period as well, raising the odds that the stock has posted a tradable low, just in time for the 2019 holiday season.

Growing optimism about a trade deal has increased buying pressure because tariffs on retail goods will compress profit margins if raised to 25% or more at the December deadline. The e-commerce giant has also had time to adjust if the trade war escalates, finding new suppliers in more friendly venues. This combination of potential tailwinds has given investors the courage to open new positions so they don't miss a fourth quarter that's expected to post healthy sales.

The stock has surged more than 4% since last week, bouncing at support while leaving behind a potential triple bottom reversal. However, it will need to mount four-month range resistance between $1,830 and $1,860 to set off more reliable buying signals and increase risk appetite that has taken a beating in the second half of 2019. That task should be easy if a deal with China is announced in the next week or two, setting up ideal conditions for a rally into year end.

AMZN Long-Term Chart (1997 – 2019)

A vertical advance following the 1997 initial public offering (IPO) topped out at $99.57 in January 1999, while an April breakout failed a week later after adding just 10 points. A second test in December produced the same result, completing a triple top pattern that broke to the downside in the second half of 2000. Aggressive sellers maintained control through the Sept. 11 attacks in 2001, finally yielding a deep low at $5.51.

The subsequent bounce posted healthy gains in 2002 and 2003, topping out at the 50% retracement of the bear market decline. A 2007 rally mounted resistance and stalled at the .786 retracement six months later, setting the stage for a 2008 decline that held above the 2006 low in the mid-$20s. This resilience underpinned a historic recovery wave that completed a breakout above the 1999 high in the fourth quarter of 2009. 

The advance allowed Amazon to enter the new decade as a market leader at the same time that widespread adaptation of broadband internet marked the start of a multi-year exodus out of brick-and-mortar storefronts and into e-commerce disruptors. Rally waves stalled at $247 in 2011 and $408 in 2014, while the upside escalated after a 2015 breakout, reaching an all-time high at $2,050.50 in September 2018.

Outlook Into 2020

The stock fell more than 1,200 points into December 2018, highlighting slowdown fears driven by the deteriorating relationship between China and the United States, while the 2019 bounce stalled in July just 15 points under the 2018 peak. The third quarter decline held the 50% retracement of the 2018 sell-off near $1,700, building a trading floor that could now support a recovery wave and breakout to a new bull market and all-time highs.

However, Rome wasn't built in a day, and mixed technicals could still delay progress and trigger a number of shakeouts, despite the most recent uptick. The upcoming announcement of trade deal success or failure will define this process, with the broad market unlikely to recover quickly if negotiations break down once again. A violation of the $1,700 level could generate widespread selling pressure if that happens, ending the nascent rally dead in its tracks.

The Bottom Line

Amazon stock's four-month correction may be coming to an end, setting the stage for a fresh bull run to new highs.

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