After the sharpest stock market correction of the year, which took place in yesterday’s trading session, it is time to review the bearish case. One day is not making a market, but the drop was important enough to consider it as a potential first bearish signal.
Coincidentally, we see a double top pattern in one of the market darlings: Amazon. The stock price of Amazon has risen last October to the upper area of its very long term trend channel ($850). That was certainly a first sign that Amazon was topping at that price area.
As seen on the chart, Amazon’s stock price came down to $680 in November, a 20 percent drop. Since then, prices have risen steadily only to test the former highs again.
We believe there is a fair chance that Amazon is topping at this point because of the fact that Amazon’s stock price chart is only rarely showing such a double top pattern. Moreover, if stock markets would start weakening at this point, Amazon would certainly not be able to move higher from here.
Interestingly, exactly one year ago we forecasted that the 800 to 900 area would be a potential topping area. The chart annotation is copied from last year, and the article in which we published the chart is here: Has Amazon Topped? Our Key Indicator Does Not Suggest A Major Top. This is a quote from that article:
The chart shows how the 2003 and 2007 tops took place right at a time when the stock price was twice its 90 WMA. Moreover, that was confirmed by a double top formation. Based on that insight, we do not see any of these conditions taking place currently. We would say that the “danger zone” is around the 850 to 900 price area.
Back then, we were still positive on Amazon. Right now, we become cautious.