What Amazon Stock's RMI Can Tell Us Post-Pullback

Why our chart analysis suggests AMZN shares could stay choppy over the short term

by Bernie Schaeffer

Published on Jun 11, 2019 at 7:21 AM
Updated on Jun 11, 2019 at 7:21 AM

A couple of months ago in this space, we wrote that Amazon.com, Inc. (NASDAQ:AMZN) -- by virtue of its unique cross-sector footprint, as well as its uncommonly massive market capitalization (around $885 billion, as of this writing) -- was worthy of tracking as its own "micro market bellwether" of sorts, given its exposure to both the consumer-dependent retail space and the "all-powerful" tech sector. As such, no fewer than a dozen price points of interest were laid out for the mega-cap stock as crucial levels to watch for the coming weeks.

And it was just this past week, as FAANG stocks opened Monday's session broadly lower on antitrust rumblings, that Amazon shares put a generous handful of those price points to a rather stiff test as support. By the closing bell, AMZN was down 4.6% to notch its biggest daily percentage drop in four months -- and, more critically, the stock settled below both its 160-day and 320-day moving averages for the first time since Jan. 3.

Back in that aforementioned April 7 commentary, we described the equity's 160-day moving average as having "briefly acted as support in late 2017 before emerging as resistance in the fourth quarter of 2018," while the 320-day moving average "played a key supportive role in 2019." So while the close below these two trendlines on Monday, June 3, was certainly alarming from the perspective of historically significant support levels being broken to the downside, alert readers will also note that AMZN's close that day occurred at 1,692.69.

Why does this matter? Because 1,691.74 represents "a 50% retracement of Amazon's decline from its Sept. 4 closing high to its Dec. 24 closing low," as observed in this space two months ago. And while the stock traded below this major retracement level on an intraday basis last Monday, it ultimately clawed off its lows to muscle above this round-number percentage area by the end of the session.

Following that brutal start to the week, Amazon stock went on to easily reclaim a perch above both its 160-day and 320-day moving averages, as it gained ground in each of the next four sessions. The bullish Tuesday-through-Friday momentum, combined with the fact that it has so far endured just one daily close beneath this trendline pair, takes some sting out of the fact that these two moving averages are fresh off a bearish cross just above 1,700.

While not called out in our original commentary, AMZN also last week encountered two rather obviously significant technical levels. First, the stock successfully avoided establishing new resistance at its 200-day moving average, after this trendline capped the equity's progress mid-week -- but only very briefly before it was (apparently effortlessly) vanquished to the upside by the FAANG name. By Friday's close, AMZN had crossed back above the psychologically significant 1,800 century level -- but the equity's endless intraday back-and-forth across this big round number leaves the prospect of some short-term backpedaling from here an open question, for now. (Recall that 1,802.36 is the site of a 20% year-to-date return, as well.)

Finally, Amazon's 20-day Relative Momentum Index (RMI) cratered last week to as low as 24.4, leaving the metric back at its late-November 2018 levels. Very broadly, an RMI move south of 30 is considered a "short" signal, while a move from below 30 to above is a "cover shorts" indicator. (In the case of Amazon, a full-blown, all-hands-on-deck short-covering scenario would take just over half a trading day to play out, at the equity's average daily volume.) And what we find with AMZN is that, following recent instances where the RMI has crossed back above 30, price action in the shares tends to stay considerably choppy until after the indicator passes all the way back atop the 60 threshold, when the equity tends to "resume rally mode."

So, to continue our conceit of "Amazon as broad-market bellwether," the sharp snapback rally off multi-layered support last week was a welcome shot in the arm for bulls, to be certain. But there are still some significant price points yet to be overcome, both immediately overhead and beyond -- so traders should be prepared for a possible continuation of volatile, choppy price action.

amzn daily chart 0607

Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, June 9.


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