She’s Up… She’s Down! Amazon is out to Get You

Oct 24, 2007: 6:57 PM CST

I have to admit – rampant volatility and major updays followed by major down days are – to me – rare in the market.  So, when such an example happens, it is always interesting to delve deeper and learn what ‘went wrong’ so that we can have a greater chance to profit or avoid mistakes in the future.

Amazon (AMZN) shocked a lot of investors/traders over the last two days, myself included.

Before we get too deep into what happened, let’s look at the chart action.  Try to feel the emotion of the traders in this stock:

amazon-oct24.jpg

Keep in mind, I deal mainly with the price/momentum action, rather than the fundamentals or ‘reasons’ why.

First, we see a large impulse up caused by the initial major gap around July 23rd.  Traders may have rushed to buy this stock, thinking it was going to slip away from them.  In fact, the large open candlestick (along with volume) indicates a lot of traders DID buy thinking prices would surge.

But they did not. 

In fact, they fell in a downswing to a potential support zone at the rising 20 period moving average.

For me, this would have set up the “Impulse Buy” trade where my stop would be placed below the 20 period MA.  I suspect a lot of traders had the same logic I would have at this point.  In fact, we do see an inflection up at this point, and I suspect many traders felt the retracement was over, support was found at the recent price highs (along with the moving average), and that we would be going higher.

But we did not.

The proper location for most stops at that point was beneath the 20 period MA, and certainly beneath the 50 period MA as a last resort.  Certainly placing stops beneath the 50 period MA would be safe.

But they would not.

Around August 18th, price sliced below the daily 50 period exponential moving average and took out any (most) remaining stops that were placed beneath the anticipated area of support.  With the stops taken out, positions were taken out and traders who expected higher prices were forced to take a loss.

In fact, potential short-sellers may have entered at this area in expectation of a new downtrend forming, or support shattered, or some other reason.   Clearly price would continue to fall if it has broken the 20 and 50 period moving averages (they thought)…

But it did not.

In fact, price rallied -quite aggressively- and almost without pause for the next two months.  Perhaps traders who were stopped out chased price higher as price continued to slip away from them.  Either way, a nice uptrend occurred and price advanced from $75 to $95 with nary a downswing.  I’m sure traders expected some sort of retracement to come to let them gracefully enter the stock at a more favorable price.  Surely a retracement would come.

But it would not.

And so the retracement came around $95 with a large volatility move against the uptrend, which – actually – served as a choice entry point into the uptrend, though the chart was showing a “topping” or overextended sort of feeling.  A Momentum Divergence was also developing.

So Amazon released earnings and price gapped $5 and then rallied $5 more dollars (the large volatility bar on October 22nd), signaling a potential breakout trade entry, and causing many traders who sat on the sidelines to enter quite aggressively into the large move in anticipation of riches, validation, and satisfaction.  Traders who entered at these levels may have been somewhat uncomfortable, but few if any could have anticipated price would fall… especially so violently.  Surely they would be safe.

But they were not.

Excited traders – probably newer traders mostly – were so excited to wake up this morning to see instant riches and profits.

But they would not.

Instead, they woke up to an instant $10 slice in price which took prices to a maximum decline of $18 at the low price of the day.

Up.  Down.  Signal.  Failed Signal.  Large move up.  Large move down.

With thousands of other stocks out there that offer cleaner patterns and reduced risk, why don’t you trade some of them?  Remember, we trade for money, not excitement.  Amazon has been a nasty trading partner for most people over the last few months, encouraging trade entries in both directions and then ripping the heads of most of the traders who took these ‘easy’ signals.

Stay sane.  Stay safe.

If you are a new trader, it might be a good idea to avoid Amazon stock for a while.

2 Comments

2 Responses to “She’s Up… She’s Down! Amazon is out to Get You”

  1. Ben Bittrolff Says:

    This kind of epic tug of war screams indecision. This kind of wild volatility too is highly suspect. When I come across this sort of behavior in a stock, in my experience, it is a reliable indicator of a significant top. Sometime they take weeks and months to form.

    I wouldn’t touch AMZN, long or short, with a 10 foot pole. You said it yourself, go for the easy pickings…

    TheFinancialNinja

  2. Corey Rosenbloom Says:

    Ben,

    Absolutely. Amazon has been a darling of traders and investors alike, but you nailed it. “Trends End in Euphoria”. I cannot recall easily such rampant up gaps and runs, and then immediately a down gap and run. Gaps of that magnitude are relatively rare, but to have two consecutive days. Gosh.

    Even wild Google looks more tame – from a gap perspective – than Amazon recently. Apple would probably be safer than them both.

    If traders just can’t hold back, trade intraday, but be very careful with Amazon from a swing trading perspective. It’s very difficult to minimize risk with a stock so volatile, and – with swing trading – one gap of this magnitude can destroy profits for weeks (or, it can create profits that will last weeks, depending on which side you’re on). To me, it’s better to ‘build wealth slowly’ and stick with more ‘down to earth’ securities.

    Thanks for the comment!