Interactive Investor

Chart of the week: can Amazon’s results blow the doors off?

25th January 2021 11:47

John Burford from interactive investor

Our chartist asks – who is selling the tech giant’s stocks, and why?

In common with most US tech behemoths, Amazon (NASDAQ:AMZN) has recovered massively from the slump that I call the ‘corona crash’ in March last year.

In fact, the shares have advanced 120% off the March lows – an incredible feat for a monster $1 trillion (£730 billion) company. Of course, it is having an excellent pandemic, along with other FAANG (Facebook (NASDAQ:FB), Amazon, Apple (NASDAQ:AAPL), Netflix (NASDAQ:NFLX), and Alphabet (NASDAQ:GOOGL)) stocks. This is because global lockdowns are heaven-sent for efficient internet-based operations. It’s an ill wind…

But bullish sentiment towards stocks has reached epic proportions – there is nary a pundit I have read that is bearish. Most are wildly bullish as they look forward to economies getting ‘back to normal’ soon as the vaccines are rolled out at speed – and central banks shower anything in sight with largesse to tide them over. The pending $2 trillion of US stimulus (the ‘Biden bung’) is the most generous of the lot.

And that has sent the antennae of the small band of contrarians twitching.

With the US dollar in an assumed slump, is there any reason not to buy US equities? What could possibly go wrong?

So, just about everyone feels positive about Amazon. But one question the bulls need to answer is this: who is doing the selling and why? For every single trade, there is a buyer and a seller.

At the end of each trading day, there have been an equal number of buy trades and of sell trades. So who are these crazy sellers? Don’t they know the price is going up? Why don’t they just hang on, sell later and thus achieve a better price?

Of course, there are many reasons for selling an advancing share, but expecting the price to be higher tomorrow is not one of them. That means that every seller today is either bearish in the near term, or neutral. That pits them against the bullish buyers – and that is what creates the market.

One point – we have known about the bullish effects on Amazon of the pandemic lockdowns from at least March, yet from August the shares have gone nowhere. It is highly likely that the company has made even more money as the pandemic has rolled on, with more severe lockdowns introduced recently. So why have the shares not responded to the upside?

Obviously, something else is going on besides the cause-and-effect conclusions the fundamentalists infer.

Here is the very instructive daily chart of prices off the March corona crash low:

Source: interactive investor. Past performance is not a guide to future performance.

The rally off that low is impulsive (in five clear sub-waves and in the direction of the main trend). But it ran into a brick wall in August at the red wave three high at the $356 level. From there, it has been tracing out a textbook flag (or wedge), which has the classic five sub-waves. The lines of support and resistance converge and a breakout approaches out of this consolidation.

If my wave labels are correct, we should see a final thrust in red wave five. Earnings for Q4 2020 are due to be released on 2 February and are probably going to be strong. But has the share price discounted a great earnings figure already? Will we see another ‘buy the rumour, sell the news’ event?

Prudence suggests taking some profits on longs.

John Burford is the author of the definitive text on his trading method, Tramline Trading. He is also a freelance contributor and not a direct employee of interactive investor.

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