Despite the significant market decline on Thursday, March 12, shares of Amazon.com, Inc. (AMZN) traded around their annual pivot for 2020 at $1,771.99. The stock set its all-time intraday high of $2,185.96 on Feb. 11 and then fell into bear market territory at its March 12 low of $1,675.00, which is just above its 52-week low of $1,672.00 set on June 3, 2019. This is a key level to hold as its weekly chart is negative.
The stock has been trading around its 200-day simple moving average for the past 52 weeks, with the share price now below that level at $1,850.46. The stock is thus in a trading range between $1,675.00 and the moving average at $1,850.46.
In the longer term, the downside risk is significant. Shares traded as low as $1,307 during the last week of 2018. A test of this low would put the stock below its 200-week simple moving average, or “reversion to the mean,” at $1,374.74. The stock has been above this moving average since the stock market bottom in March 2009.
Amazon has missed earnings per share estimates in two of the past three earnings reports. The stock is not cheap – its P/E multiple is 79.13, and it does not pay a dividendaccording to Macrotrends.
The daily chart for Amazon
The daily chart for Amazon shows that the stock moved sideways over the past 52 weeks, tracking its 200-day simple moving average now at $1,850.46. The stock gapped higher on Jan. 31 on a positive reaction to earnings reported after the close on Jan. 30. This set the stage for a quick spike higher to its all-time intraday high of $2,185.35 set on Feb. 11.
As the coronavirus spread around the world, shares of Amazon gapped below the semiannual pivot at $2,078.34 on Feb. 24. The stock then bounced off its annual pivot for 2020 at $1,771.99 on March 9 but gapped below it on March 12. The stock ended the week above this key level. The problem I see with this chart is the significant downside risk given a break below the June 3, 2019, low of $1,672.00.
The weekly chart for Amazon
The weekly chart for Amazon is negative, with the stock below its five-week modified moving average of $1,918.67. The stock is well above its 200-week simple moving average, or “reversion to the mean,” at $1,374.74, which has not been tested over the past five years. The 12 x 3 x 3 weekly slow stochastic reading ended last week declining to 55.56, down from 68.66 on March 6.
Trading strategy: Buy Amazon shares on weakness to the annual value level at $1,771.99 and reduce holdings on strength to the semiannual risky level at $3,078.34.
How to use my value levels and risky levels: Stock closing prices on Dec. 31, 2019, were inputs to my proprietary analytics. Quarterly, semiannual, and annual levels remain on the charts. Each calculation uses the last nine closes on these time horizons.
Monthly levels for March were established based upon the Feb. 28 closes. New weekly levels are calculated after the end of each week. New quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year. Annual levels are in play all year long.
My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility, investors should buy shares on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before their time horizon expires.
How to use 12 x 3 x 3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.
The stochastic reading covers the last 12 weeks of highs, lows, and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading, and I found that the slow reading worked the best.
The stochastic reading scales between 00.00 and 100.00, with readings above 80.00 considered overbought and readings below 20.00 considered oversold. A reading above 90.00 is considered an “inflating parabolic bubble” formation, which is typically followed by a decline of 10% to 20% over the next three to five months. A reading below 10.00 is considered “too cheap to ignore,” which is typically followed by gains of 10% to 20% over the next three to five months.
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.