So far, the destruction in tech stocks has been the overarching theme of 2022.
Many tech stocks are trading at just a fraction of their former values.
Today, let’s take a close look at one of the heaviest hitters – Amazon (AMZN) – which has seen its stock price plummet.
From its November 2021 peak, AMZN has lost a massive 45% in value and is now trading back around its pre-pandemic levels.
However, over the last month, the AMZN stock price has shown some promising signs and resilience.
Despite higher inflation data and a mega rate rise (0.75%) a week ago, AMZN shares are trading no lower than they were over a month ago.
Let’s check out the chart…
Amazon (AMZN)
Source: eSignal
There’s a series of lower highs – from AMZN’s November 2021 peak at ‘A,’ through its 2022 high at ‘B,’ – followed by its recent bounce at ‘C.’
This long-term downtrend is also shown by the 50-day moving average (MA – blue line), which started heading lower in January.
Apart from a brief period in March to April, the 10-day MA (red line) has also remained below the 50-day MA (a bearish signal).
I’ve also been watching the action in the Relative Strength Index (RSI)…
The highs at ‘A’ and ‘B’ corresponded with the RSI forming an inverse ‘V’ and reversing lower from overbought territory (upper grey dashed line).
And more recently, the RSI reversed even lower after briefly breaking through resistance (green line). It now locked in a recent peak at ‘C.’
However, the RSI’s action around oversold territory (lower grey dashed line), has also caught my attention.
After rallying out of oversold territory in mid-May, the RSI made a series of lower highs (red line in the bottom half of the chart).
This increase in momentum has enabled AMZN to form a short-term base at the orange line.
And the relationship between this price level and the RSI will determine AMZN’s next price action.
So, what can we expect from here?
Let’s take another look…
Amazon (AMZN)
Source: eSignal
If the RSI continues to track higher, then we can expect further upside momentum with AMZN.
For example, if the RSI breaks up through resistance (green line) and into the top half of its range – we could see AMZN trade back up toward its recent peak at ‘C’ (around $129).
And this could provide the setup for a potential long trade.
Any further rally beyond that would then depend on the 10-day MA breaking back above the 50-day MA.
However, the action around the RSI remains key…
If the RSI instead breaks below its support at the red line – and remains in the lower half of its range – then any bounce in AMZN will be short lived.
And that would put AMZN’s short-term support level under pressure.
A break below support (orange line), along with the RSI remaining in the lower half of its range, would likely be the start of another down leg.
Despite a 45% fall, and a sea of negativity, AMZN is now looking for a reason to bounce after holding support for a month.
In doing so, it would provide a vital shot in the arm for a market in desperate need of a rally.
As always, we need to be hyper-vigilant when markets are volatile.
That means we must let the charts (not our emotions) determine both our entry and exit strategies.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
Reader Mailbag
In today’s mailbag, Cynthia and Fernando share their thoughts on the latest content from Trading With Larry Benedict…
Dear Larry,
I enjoy reading your take on the market. I have yet to do options trading. I’m not good at it, but I want to be good and not lose money.
Anyhow, I’d like a trade recommendation that you feel is a good buy and then tell us when to sell. I need to build up my bank so I can do the options trading.
– Cynthia S.
Great e-letter as usual. I like to see the risk/reward explained from Larry on a setup. Thanks.
– Fernando O.
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