Why Amazon’s Overbought Shares May Fall 15%

(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Shares of Amazon.com Inc. (AMZN) may be headed for a steep decline of nearly 16% taking the stock to approximately $1,190. Shares of Amazon have climbed by over 74%, over the past 52 weeks, and were up by over 21% for 2018 through February 7, closing at $1,416. But those enormous gains may be starting to melt away as shares of Amazon continue to sit at overbought technical levels. (For more, see also: Amazon Never Makes Money But No One Cares.)

Amazon shares have surged over the past year as the company has seen surging revenue growth and its dominance in e-commerce continues to grow. But all the positive news has led to a level of exuberance in the stock that has caused the stock price in the shorter term to become extremely overextended. In fact, even while the broader stock market was experiencing high levels of volatility, Amazon shares have performed exceptionally well, rising by over 1%, while the S&P 500 has declined by 6% from January 26 through February 7.

Over-Extended Shares

Amazon shares reached a relative strength index (RSI) reading of nearly 89 at its peak on January 31. The RSI has only reached that extreme reading for Amazon two previous times, in 2005 and 2007. In 2005, the reading came when the stock surged from roughly $32 to $46, a climb of roughly 43%, and proved to be a short-term top resulting in the stock declining about 11% back to $41. But in 2007, the high RSI reading came after shares nearly doubled from roughly $36 to $62, followed by a month of sideways consolidation. 

Buyer Exhaustion

But also indicating shares of Amazon could be headed lower on the daily chart, is that surge in volume as the stock stalls out, suggesting that perhaps the sellers are now taking control and overwhelming the buyers. We can see that during most of the rise, volume was climbing and peaked right as the stock price peaked, and since that time has started to decline. This likely means that the buyers have become exhausted. 

Broken Trends

Finally, the 15-minute chart is showing how the uptrend has been severely damaged, and the stock was unable to hold that trend on the second attempt in intra-day trading on February 8. With that trendline broken, the first level of support likely comes around $1,250. But that support looks thin, and the more critical area rests around $1,190. (For related reading, see also: Top 10 Companies Owned by Amazon.)

There has been severe technical damage in the chart of Amazon after reaching extremely overbought levels, and a pullback in the price should be viewed as a healthy correction for the stock that can likely continue to work higher over the longer-term should the fundamentals continue to flourish. 

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.