Chart of the week: How to trade Amazon stock after the crash

After calling this spectacular 16% collapse with amazing accuracy, technical analyst John Burford explains where he thinks the shares are heading now.

Amazon is following my roadmap   

We are witnessing exciting edge-of-the-seat action in stockmarkets, are we not? Emotions are starting to heat up as share after share refuses to obey the wishes (and hopes) of the Dip Buyers. 

At nervous times like this, the vast majority of pundits urge caution and keep repeating the age-old mantra of 'hold your nerve' in an effort to wish the unfolding disasters away.

But are they acting like the Alec Guinness character in the film "The Bridge on the River Kwai" who refuses to see the disaster unfolding in front of him – and moves heaven and earth to try and prevent the inevitable?  Although a British officer, he had overseen the construction of the railway bridge by captive allied prisoners and took great pride in it. When confronted with those determined to destroy it, his mind was thrown into chaos as he was unable to reconcile the huge conflicts suddenly emerging within.  Flexible he was not.  He is not a good role model for traders/investors today!

One of the victims of the destructive mood is Amazon and, in my COTW of November 5, I laid out my case that it would likely follow the Gouda Tulip path traced out in the 17th Century (since human nature never changes).  Both are manias that inevitably exhaust and fall back to earth.

The dictionary definition of a mania: A mental illness marked by periods of great excitement or euphoria, delusions and hyperactivity. Sufferers do not think anything is wrong.

And that is a perfect description of a mania in finance.  When in a manic episode, who can resist the lure of ever-rising prices and excited stories of the massive upside potential? Certainly, hedge funds cannot as they chase the 'momentum' of anything that moves in this way.

But very few who jump on board have an exit strategy.  In their bullish fervour, all they can see are the riches that are sure to be theirs for the taking.  And dips are always there to be bought! These are like manna from heaven - a gift from the gods. And when that strategy works time after time (as it has since 2009), what fool is it that tells then to stop doing it?

• Proof that you can predict a market top
• This is where fund managers think markets will peak

Of course, the best time to invest is near the start of the manic action (before it becomes one!).  And the best time to take profits is when reality strikes in a Wile E. Coyote light bulb moment.  Easier said than done.  But that is generally when the animal spirits are surging and the bullish herd has maxed out.

This was the chart I showed last time:

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

I indicated a likely change of trend when the market broke out of the lovely pink ending diagonal following a classic bearish overshoot.  It had traced out a textbook impulsive five waves down to my purple wave 1 of a larger pattern to come.

As the market was pushing up out of the very oversold condition, this is what I wrote on 5 November: 

"Now, the plunge has occurred in a clear five wave impulsive pattern – and that means the main trend is now down with high degree of confidence.  My guess is that the maximum upside for wave 2 is a kiss on the blue trendline and then a devastating third wave down to mimic the path taken by those ancient Gouda tulips centuries ago."

So, is my forecast panning out?  Here is the updated chart:

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

It certainly is as the bounce did carry to the precise underside of the blue tramline in a lovely Kiss Goodbye and now is in a sharp Scalded Cat Bounce down.  And that rally to $178 was a magnificent opportunity to add to shorts at low risk.

Remember, I called that high days before it occurred with high accuracy – and this is what my powerful Tramline Trading methods can do for you.

And who in their right mind in late September called for a 25% collapse in just a few weeks?

It appears we are now in wave 3 down – and these waves are among the most persistent in the book.  But expect brief rallies on this downward path.

For more information about Tramline Traders, or to take a three-week free trial, go to www.tramlinetraders.com.

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.