After Rounded Arc AMZN Challenges Resistance or Breakout

Apr 15, 2010: 11:31 AM CST

For those who follow or trade Amazon stock (AMZN), you may have noticed a very interesting pattern recently – that of a nice “Rounded Reversal” or “Rounded Arc” pattern that has now taken us back to prior resistance on the verge of another potential breakout.

Let’s take a quick look at this pattern what what levels to watch going forward for the stock.

Rounded Reversals (also called “Scallops,” “Rounded Arcs,” “Saucers,” etc) are some of my favorite price patterns because they’re easy to spot (in terms of divergences forming at the bottom of the pattern) which then gives a potential pathway to the future if the pattern does play out as expected.

AMZN shows a good example of the positive divergences forming in February when combined with a ’rounding’ to the decline (instead of the opposite reversal – a “V-Spike” or hard reversal), led to an aggressive expectation of a similar upside move.

The trigger or entry into the pattern was as March began with a strong bullish breakout candle that took price above the recent $120.00 high and also the 20 and 50 day EMA at the $125.00 level (entry was about $125.00).

The pattern did play out as expected, giving two more entry signals on the pullbacks to the rising 20 EMA in late March and early April.

For now, we’ve met the target of the pattern and now stand at prior resistance from the December 2009 high at $145.00.

Any breakout above $145.00 would likely be met as a new buying opportunity, creating the positive feedback loop where buyers buy and shorts (bears) also buy to cover (stop-losses).  Be aware of that ‘loop’ forming.

Until then, $145.00 is still overhead chart (prior price) resistance, and we do see a negative momentum divergence there (just a caution signal – not a reversal signal unless confirmed with price moving down).

The resolution should be interesting and could provide a trading opportunity for intraday and swing traders depending on what happens at this key inflection point.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

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