Record high with hidden pain

There is no doubt that Amazon is one of the few best growth stocks in the planet, period. Quarter after quarter, it has easily beaten earning expectations and seems it cannot never fail. Whenever Amazon touch something, the targeted business will suffer. So from the fundamental and business perspective, casting any doubt on Amazon is equal to suicide. But it does not mean  the Amazon stock prices can only go up. From time to time, it may go too much ahead of itself, which may cause it to at least pause but may also trigger some hard selloff before resuming its next leg up. I think the moment for a potential severe selloff may be just around the corner. Let me explain.




Last Thu Amazon issued another superb earning report. No doubt, traders got really excited and there was no lack of FOMO people who were afraid of being left out and couldn't help but chase it after hours. Amazon shot up by 160 points and touched $1638 at the peak. It must be a heart-broken experience for those high chasers as it gave back 2/3 of the overnight gain at closing on Friday. This price action was quite bearish by itself as there was no convincing buying momentum to support its immediate uptrend. But more troublesome problem for Amazon is really embedded in its technicals. As you can see below, while the share price is going up, its momentum indicator MACD is going down, a bearish negative divergence. This is even more prominent in its weekly chart, suggesting a relatively longer term bearish trend.

Another topping sign comes from its sharp distance from its 200 DMA. As a general rule, when a price is too much away from its moving average, it usually corrects to close the gap, so-called reversion to mean. When the gap is 15% or more, it is very significant and vulnerable to a correction. In the past 10 years, AMZN has experienced 3 such incidences (see the arrows) and each time, it corrected to return towards its 200 DMA in the following weeks. This time, the gap is a whooping 35%, a very drastic elevation from the moving average. While there is no guarantee a severe correction must occur as it can simply stay sideways and let the 200 DMA come up to close the gap, I do think a chance is high for AMZN to correct in the next few weeks. The bearish technical setup plus the historical trend supports the near term downward trend for AMAN. Be prepared for the pain if you are long AMZN. Don't chase it if you are thinking to do so, at least for now!