Amazon.com, Inc. (AMZN) is rapidly entering bearish seasonality that could trigger a painful first quarter decline of 15% to 20%. The sell-off may target and fill the Oct. 27 gap between $980 and $1,050, generating a key test of support at the $1,000 level. A failure to hold that psychological floor may generate even stronger sell signals, setting the stage for a long-term top or prolonged correction.

The flip of the calendar marks the start of capital gains tax selling season, when market players dump their biggest winners of the prior year to incur tax liability and free up capital to allocate into weaker performers through the January Effect. In addition, the retail sector exits the most seasonally positive period of the year as soon as holiday results are disseminated and discounted, often triggering steep declines. (See also: Trump Targets Amazon in Call for Postal Service to Hike Prices.)

AMZN Long-Term Chart (1997 – 2017)

 

The company came public at a split-adjusted $1.97 in May 1997 and entered a stair-step rally that accelerated in 1998 at the height of the internet bubble. Aggressive sellers emerged near $100 at the start of 1999, generating two tests into the new millennium while yielding a new high at $113 that limited further upside for nearly a decade. The bottom dropped when the bubble burst, triggering a decline that reached the single digits before ending in the fourth quarter of 2001.

A bounce into the fourth quarter of 2003 stalled at the 50% bear market retracement just above $60, yielding a slow-motion decline that persisted through most of the mid-decade bull market. The stock finally turned higher in 2006, stalling within 12 points of the bubble high in October 2007 when the broad market topped out. It performed relatively well during the 2008 economic collapse, posting a higher low that set the stage for stronger performance during this decade.

A 2010 breakout marked the inception point of a log scale rising channel that is still in force eight years later. The stock has not tested channel support, now at $650, since January 2015, while it has reversed at channel resistance five times in the past three years. The most recent failure unfolded in December 2017, when it broke the channel and turned tail, setting off preliminary sell signals. Meanwhile, broad action since 2008 has carved a long-term Elliott five-wave advance. (For more, see: Amazon's Digital Ad Push Threatens Facebook, Google.)

AMZN Short-Term Chart (2015 – 2017)

 

The arithmetic view since early 2015 exposes a second rising channel, with four failed breakout attempts in two years. Price action has extended from support to resistance in the past three months, marked by an unfilled breakaway gap between $980 and $1,050. A downturn that starts from the current level would place that charting feature at the .618 rally retracement level, establishing a possible magnetic target for the first quarter.

On-balance volume (OBV) entered a historic accumulation phase after the bear market, lifting through a long series of new highs into July 2017, when then stock traded up to $1,083. A higher September low generated fresh buying power into year end, but the indicator has failed to reach a new high, signaling a bearish divergence that adds weight to a sell-off scenario in the first quarter.

Range-bound price action since November should guide short-term buy and sell signals, with an all-time high at $1,213 on Nov. 27, followed by a pullback and bounce that has failed to pierce the .786 range retracement. This establishes $1,195 as a key level to watch, with a reversal at or near that level raising the odds that support near $1,125 will break and set off larger-scale sell signals. (See also: Amazon Forces Suppliers to Play by Its Rules.)

The Bottom Line

Amazon stock could trap complacent shareholders in the coming weeks, turning sharply lower and heading into a test at the $1,000 psychological support level. (For additional reading, check out: Amazon Eyes Boxes in Effort to Cut Shipping Costs.)

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

Want to learn how to invest?

Get a free 10 week email series that will teach you how to start investing.

Delivered twice a week, straight to your inbox.