Warning: This Stock Could Drop

Shares of Amazon.com, Inc. (NASDAQ:AMZN) despite currently trading about 10% off its July all-time highs remains higher for the year to date by just about 30%. While still holding on to just about any intermediate- and longer-term bull trends, AMZN stock’s late-July pop and drop does raise further concern the longer the stock fails to put in a strong bullish reversal.

In full disclosure and to be clear, I like AMZN stock for the longer term and am a believer in the company.

However, as a realist and active market participant, I also would like to take advantage of opportunities in the nearer- to intermediate-term time frames, which can mean going against a longer-term bull trend, for a trade.

Over the years I have found that having a multi-time-frame approach to trading and investing not only is a better way to risk manage through the ups and downs of financial markets but also a great way to gain perspective.

AMZN Stock Trade Idea

Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week

Looking at the multiyear weekly chart of AMZN stock we see that the latest steep rally that started in 2015 has played out in an orderly up-trending channel, the lower end of which is also well supported with the yellow 50-week simple moving average.

Note that in late July, the stock had once again reached the upper end of the ascending channel and on this weekly chart left behind a notably “buying exhaustion” candle on a weekly closing basis. This was followed the next week (first week of August) by a down-week, thus completing at least a near-term top in the stock.

Also note that the late-July rally marked a lower high in momentum (bottom part of chart) as compared to the momentum high in 2015.

Moving averages legend: red – 200-day, blue – 100-day, yellow – 50-day

On the daily chart, we see that AMZN stock is now also tracing out an ominous technical pattern called a “head and shoulders” pattern. With a left shoulder in June, the head in late July and the right shoulder still being built, the pattern’s “neckline” is the well-defined black horizontal that comes in around the $945 mark. Very simply, a break and hold below this area could get another leg lower underway for the stock.

Using a traditional head-and-shoulders pattern price target measurement technique, this pattern as it stands could lead to a downside target at $800, or about another 17% lower from current levels.

A more conservative first downside target however is closer to $900, which is where the stock’s red 200-day simple moving average currently resides.

Reversing stocks such as AMZN stock currently is can be taken advantage of with a high-probability income-generating strategy using options. For those unfamiliar with this powerful income strategy I am holding a special webinar for InvestorPlace readers TODAY at 7 p.m. Eastern, 4 p.m. Pacific.

So, active investors and traders could look to either take more profits in medium- to longer-term AMZN stock positions, or leg into near-term bearish trades (long puts, short call spreads or short stock), using a stop loss at $1,020 and a first downside target around $900.

— Serge Berger

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Source: Investor Place