Chart of the week: The very best waves to trade
Performance has been sensational, but our analyst believes time is up for the world's biggest retailer.
20th May 2019 11:38
by John Burford from interactive investor
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Its performance has been sensational, but our analyst believes time could be up for the world's biggest retailer.
Is the recent Amazon recovery for real?
I have been tracking this hugely popular share for some time, especially since September last year when Amazon (NASDAQ:AMZN) made its all-time-high at the $2,040 level. And it was one of the select few shares that were driving the Nasdaq index into stratospheric levels as a member of the FAANG Gang.
In short, I was expecting a major high in this index based on my reading of the wave patterns and the extreme bullish sentiment prevailing.
Not only that, but a record number (over 80%) of US IPOs were loss-making last year and were coming to market being greeted with rapture by investors. Their love of multi-billion losses knew no bounds.
Of course, I knew this couldn't last. Incidentally, I believe the recent major loss-making Lyft (NASDAQ:LYFT) and Uber (NYSE:UBER) IPO failures were nails in the coffin for the bull market.
But one thing is for certain - investors will lose their appetite for big losses; it's a question of when.
But back in September, Amazon was all the rage, except that it peaked and started a major correction in a clear demonstration that when everything appears terrific for a company, that’s when tops tend to occur.
Here is the long-term weekly chart:
Source: interactive investor Past performance is not a guide to future performance
In fact, the ride has been exponential, with rapidly increasing slopes a la bitcoin. And exponential rallies never end with a whimper – they tend to suffer breath-taking collapses. And the correction after September certainly qualifies as one of these as the shares dropped to the $1,300 level for a loss of 36% off the high.
For the share of a company that devours all in its path, that large magnitude loss must have been a wake-up call to complacent investors who believed tech shares can only go up, especially all-conquering Amazon. They're unstoppable, right?
But since then, the recovery has been swift, and this is the period I wanted to focus on as I was looking out for signs of a top to this recovery. If a top is in this current area, it would likely be a second wave. And all second waves lead to third waves in the opposite direction – and these are the very best waves to trade (they are long and strong).
Source: interactive investor Past performance is not a guide to future performance
This pattern remains valid so long as no new all-time high is registered (above $2,050). The large momentum divergence points to a swift decline.
My first major target is the $1,600 region.
The bottom line is that I expect the shares to decline (currently $1,870) but a move above the $1,950 level would temporarily suspend this outlook.
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.
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