Amazon.com, Inc. (AMZN) Prime Day 2020 this week seemed to lack the headline power of past events, with the stock dropping more than 200 points after a quick run-up on Monday. The sell-the-news reaction highlights the range-bound tape in place for the past three months, with the e-commerce juggernaut crisscrossing the $3,250 level, which marked the July 13 rally peak. This sideways action could persist into and through the Oct. 29 earnings report.
- Amazon stock may be "priced for perfection" after doubling off the March low.
- Political headwinds could undermine the uptrend in coming years.
- There is little technical evidence so far that the 2020 rally is coming to an end.
Classic market lore warns traders and investors the "bigger the move, the broader the base." Amazon stock has posted an incredible 100% return since the March low, while 2020-to-date marks the best year in its 23-year public history, indicating that the stock may now be "priced for perfection." In turn, this raises the odds for a long period of laggard performance, unless another super-catalyst like the pandemic alters consumer behavior.
The next presidential administration could also mark a key turning point for the $1.7 trillion behemoth, regardless of who wins the election. President Donald Trump is no friend of CEO Jeff Bezos, who also owns The Washington Post. It's no better on the other side of the aisle because Democrats have made it crystal clear that they'll be looking at monopolistic practices of American mega-techs if they take control in November.
Wall Street consensus on Amazon is pure perfection despite windfall share price gains, with a "Strong Buy" rating based upon 37 "Buy" recommendations. Not a single analyst covering the retailer has posted a "Hold" or "Sell" rating. Price targets currently range from a low of $3,400 to a Street-high $4,500, while the stock is set to open Friday's session about $40 below the low target. While higher prices seem inevitable given this placement, the unanimity could mark a red flag.
A monopoly refers to when a company and its product offerings dominate a sector or industry. Monopolies can be considered an extreme result of free-market capitalism in that, absent any restriction or restraints, a single company or group becomes large enough to own all or nearly all of the market (goods, supplies, commodities, infrastructure, and assets) for a particular type of product or service.
Amazon Weekly Chart (2010 – 2020)
The stock mounted the 2000 high at $113 in 2010 and entered a rising channel that held intact into a 2017 breakout. The uptick stalled in September 2018 just above $2,000, giving way to an intermediate correction that carved an ascending triangle pattern. It broke out in February 2020, but the rally failed, yielding a vertical decline that stretched more than 550 points. Market players then recognized the consolidation of retail power into a few mega-caps, triggering a vertical recovery wave that reached the prior high in April.
An immediate breakout stalled quickly near $2,500, yielding a small platform, followed by a strong rally impulse that stretched to $3,250 in July. The stock cleared that barrier in August, posted an all-time high at $3,552 in September, and failed the breakout a few days later. The subsequent descent to $2,871 undercut the July 24 low, marking the first 100% retracement in the six-month uptrend and setting off a red flag that is still in place.
Accumulation-distribution indicators peaked at the July high and have wobbled sideways for the past three months. This is classic behavior during a corrective phase, but the stock is still engaged in weekly and monthly-scale buy cycles, according to the stochastic oscillator. In turn, this suggests that market players will continue to buy weakness and sell strength into the late-October earnings report.
A stochastic oscillator is a momentum indicator comparing a particular closing price of a security to a range of its prices over a certain period of time. The sensitivity of the oscillator to market movements is reducible by adjusting that time period or by taking a moving average of the result. It is used to generate overbought and oversold trading signals, utilizing a 0-100 bounded range of values.
The Bottom Line
Amazon stock has entered a corrective phase, but there is little evidence so far that the powerful uptrend is coming to an end.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.