Strategy Planning at Key Inflection Zone for Amazon AMZN

May 16, 2013: 2:17 PM CST

As a trader, I’m drawn to key price or trendline inflection points that generate simple “IF/THEN” strategy planning events depending on how price interacts at a critical reference level.

At the moment, Amazon (AMZN) shares are trading down from a critical inflection point that will set the stage for short-term trading strategies for the stock.

Let’s take a quick look at the current inflection zone and note what the expectations will be for channel or pattern continuation or else a breakout above the known resistance/inflection level.

Keep in mind our goal here is not to predict the future, but to note price behavior (supply/demand) at a key inflection point.  Trades develop naturally from the higher timeframe structure as we watch the lower frame evolve in real-time.

For now, the simple key inflection point for Amazon is the $270 per share level as it reflects the upper bound (target) of a falling range (declining parallel trendline) pattern.

A breakthrough ABOVE this inflection point that carries above the prior “spike” or Bull Trap high into $275 would be expected to continue through “Open Air” back to the prior established high into $285 per share.

That’s the Bullish “IF/THEN” Scenario Plan.  The Bearish plan calls for a simple continuation of the short-term pattern which would suggest a bearish outcome all the way back to the $245 per share level (the lower boundary target).

We’ll be following along in real-time comparing evidence as to whether the bearish $245 target or $285 upside breakout target is favored.

For now, odds seem to argue in favor of the downside target given the negative divergences and the two doji reversal candles into the critical $270 target.

When in doubt, or to get additional information from a Higher Timeframe Inflection level, drop to intraday charts:

The Hourly/intraday chart shows the recent rally up to the $270 target in May which has been ‘undercut’ by negative volume and momentum divergences along the way (ever since the volume and momentum peak on May 3).

Again, the chart evidence points for simple odds – at least from an intersection of divergences into resistance – as favoring a bearish outcome.

However, as traders, we are always aware to alternate possibilities if only for risk-management strategies (placing stops above an expected resistance zone).  It would be far too easy if everything worked exactly as expected!

Savvy or aggressive traders can also set up a game plan to buy shares on a breakthrough above a resistance level that odds (charts) suggested would hold firm.

The strategy is to trade an unexpected breakout and the expected “Short-Squeeze” or popped stops impulse that would likely occur on a surprise breakout.

Thus, we’ll plan for a bullish breakout on a firm breakthrough above $270, allowing the one-day possibility of a vicious Bull Trap (a bull trap occurred on the April 25th high which preceded a ‘collapse’ in price the next session).

Otherwise, we’ll continue monitoring price should it continue trading lower as the divergences and resistance (Daily Chart Declining Trendline) pattern suggests.

If a full downside target is achieved, it will likely do so with a few chances for intraday traders to sell-short intraday bear flag or breakdown trades that occur in real-time as price moves toward the target.

This is an example of scenario planning on the higher timeframe which guides trading decisions on the lower frame.

Corey Rosenbloom, CMT
Afraid to Trade.com

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3 Comments

3 Responses to “Strategy Planning at Key Inflection Zone for Amazon AMZN”

  1. Steven Adams Says:

    Corey, thanks for the post. In a situation like this, stock at resistance, have you used a long straddle before? This seems like it may be a good play here in a low premium environment with AMZN already having gone through earnings. Just wondered if you had implemented this strategy before and what your results may have been.

    Thanks,
    Steven

  2. Corey Rosenbloom, CMT Says:

    Steven,

    I used options when I switched over to the swing trading landscape in 2004/2005 but have opted for straight ETF or stock plays instead of using options (straight plays tended to be more profitable than option plays for me personally) but there's nothing at all wrong with applying an option strategy to a key inflection point on a chart. The straddle would be a great idea particularly when planning or trading a breakout of a low volatility price coil like a rectangle or preferably a triangle but I'm not sure it would be as profitable trading within the pattern itself but we can follow this and similar situations to test these ideas out.

  3. Five Uptrending Stocks at New 52 Week Highs to Start July | Afraid to Trade.com Blog Says:

    […] Our last update with Amazon discussed the inflection point in May and the possibility for a breakout (which occurred) or else a continuation swing within the boundaries of the falling trendlines as drawn. […]