Did You Hear the One About Amazon? Two Lessons from AMZN

Oct 24, 2009: 3:29 PM CST

With Amazon leaping 27% Friday to an all-time high, it’s certainly a good idea to take a look at its current chart to see the progression that led to this move.  Let’s take a quick look at Amazon’s (AMZN) weekly and daily chart.

On better than expected earnings, Amazon gapped Friday as seen in the daily chart below.  This is how the earnings ‘pop’ affected the weekly chart.

Price was challenging resistance overhead at the $95/$100 per share level which was both “round number” resistance and prior resistance from the 2007 price highs.

Underneath this resistance, price had formed a negative momentum divergence similar to that which formed in 2007.

The spike to new highs above $100 (price opened Friday just above $110 and ran higher the whole day) triggered virtually all stop-losses from the short sellers who had positioned themselves short due to any bearishness they found in the stock, as mentioned above.

This is the “stop pop” logic played out on a larger scale, which works similarly to an avalanche beginning small then careening out of control – or in the market, we call it a “Positive Feedback Loop.”

While the weekly chart was showing a bearish posture as long as price was under $100 (resistance and negative divergences), the daily chart was not that negative.  In fact, one could have gleaned a bullish structure from the daily chart.

Going back to simple TA, the trend was up and price was above all key daily moving averages, and they were in the most bullish orientation possible.  In fact, prior to Friday’s ‘boost,’ a bullish doji/hammer candle formed just above support at the 20 period EMA.

To be clear there was nothing to tell you price would surge like this in the morning – that’s the risk traders take when the trade in front of an earnings report – sometimes you get stellar moves like this… other times you get shocking moves down against you and it turns into a risky gamble for most traders.

As many chart watchers and traders will tell you, however, the large positive surprises tend to occur in stocks that have been moving up for some time.  In other words, surprises have a tendency – but not ‘hard and fast’ rule – to come IN the direction of the prevailing trend.

Thus, there’s (at least) two lessons chartists can pick up from Amazon’s ’surprise’ huge move up on earnings.

1.  “Surprises” often happen IN the direction of the prevailing trend

2.  “Surprises” which ‘bust’ sell signals (taking out stop-losses) often create larger moves than expected (in the opposite direction)

Amazon’s surge is huge news, particularly if it can be sustained at these higher levels.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

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6 Comments

6 Responses to “Did You Hear the One About Amazon? Two Lessons from AMZN”

  1. JeffreyLin Says:

    that's ridiculous

  2. flyboy08 Says:

    I agree with the post below….RULE? What does beating earnings have to do with TA? Especially artificially low earnings!

  3. A Few Good Weekend Reads | HighYields.com Says:

    [...] * AMZN and how “surprises” tend to occur in the direction of the market trend; [...]

  4. drick Says:

    ill buy a put or 2 on amzn for jan..125s?

  5. vatsalpatel Says:

    I would like to have ur elliott wave count analysis on $CNXN (Nifty of Indian Stock market)alongwith ur valuable remarks…I would be oblidged

  6. vatsalpatel Says:

    I would like to have ur elliott wave count analysis on $CNXN (Nifty of Indian Stock market)alongwith ur valuable remarks…I would be oblidged