Wed Jun 18 2014
Live Index (1454 articles)

Popular Internet Stock Headed for a Steep Sell-Off — Get Out Now!

Sometimes the fundamentals matter and sometimes they don’t. For Internet retail (NASDAQ: AMZN) it’s been a toss-up. Thursday’s underwhelming news that the company would stream music to its Prime customers clearly disappointed. Services like Spotify and Pandora Media (NYSE: P) dwarf Amazon in terms of songs, which does not have a deal with top dog Universal Music Group.

The stock sold off 3% on the day, and it looks like the bears are in charge for now.

Even with the decline, AMZN still sports a trailing 12-month price/earnings (P/E) ratio north of 500 and a forward P/E close to 100. Is that high? Maybe not for a hype-driven stock such as Amazon. It was nearly twice that in early January, again just before news sent the stock tumbling. In that case, it was a weaker-than-expected earnings report.

This is why it is important to keep an eye, or both, on the charts.

Technically, the May-June rally ran into trouble at the declining trendline from the January high. Supporting indicators, such as cumulative volume and momentum, were tepid, suggesting that there was not much power behind the rally.

Candlestick charting aficionados will notice that the past three days left a bearish evening star pattern. This is comprised of a strong up day, a day of indecision and then a strong down day, and we can think of it as the tide turning.

That it occurred at the trendline, as well as in the vicinity of the 200-day moving average, makes it a more powerful signal for the bears. But there is more.

If we look back over the past few months, we will see that the $ 340 level, plus or minus 2-3 points, served as an important transition area. In November and again in January, it was a floor for prices as they fell. In April, and now in June, it was a ceiling. In technical analysis, this switch from support to resistance is very common, and for AMZN, it reinforces the idea that the rally is over.

The next support and target is in the $ 288 area defined by the May low. Further, the rising long-term trendline from the 2008 low will be in the vicinity in just a few weeks’ time.

Interestingly, we can follow the $ 288 level back to the August 2013 low and the January 2013 high to confirm it yet again as an important level.

Recommended Trade Setup:

– Sell AMZN short at the market price
– Set stop-loss at $ 340
– Set initial price target at $ 288 for a potential 12% gain in five weeks

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