So many of our hopes and dreams have become entangled in Amazon (AMZN) that it will likely be the proverbial fat lady singing the finale as the curtain closes on the bull market from at least the 2009 low.
The company has been around for 20 years, so most investors don't view it as still in parabolic ascent (nearly vertical). However, when viewed from the proper perspective, this is exactly what is happening. Unfortunately, history illustrates that parabolic rises always end with sudden reversals, resulting in crashes to the origin of the parabolic launching point.
As emotional beings, we humans need validation for most everything we do. Even so-called contrarians seek validation from other contrarians. This is called our herding instinct; seeking safety in crowds. It works like this: Rising up into the 2013 price peak near $400, after a sevenfold increase from the 2002 crash low, the story of Amazon was driven by the company's refusal to show net earnings. The allure of an eventual earnings number kept investors buying dip after dip.
At its 2015 low near $300, earnings became less important as the company's Amazon Web Services business became the focal point of the "cloud" fad, and the parabolic portion of the company's price pattern took off. The last two years of AMZN's growth have achieved twice the point gain that the prior 18 years produced, as the crowd became fully associated in the Amazon world-dominance theme.
Here's the rub, though. Eventually, the parabolic pattern will end, as they all do; poorly. At that moment, the crowd will still be buying, planning to buy any dip, and planning to buy more if the dips develop into a full-blown correction. The trap will have been set, and sprung, and the reaction will be the biggest surprise in the history of its public trading life.
The reason that reversals after parabolic rises crash to the origin of the pattern is that the sentiment to achieve vertical price behavior must reach epic bullishness. This includes buying on margin as the herd believes they can borrow money to achieve even bigger gains than using only the funds they actually have. After all, what's the risk? It's a sure thing.
This goes on and on for longer than most can imagine until what pilots call the stall point; where the vehicle's vertical rise can no longer be powered by its own engine. The engine stalls, and the plane flips over and falls to earth due to gravity. If the pilot can't restart the engine soon enough, the plane will crash.
Amazon (AMZN) -- Quarterly bars
Above is Amazon's long-term chart since inception. The yellow box is where the wheels came off the rational bus, and the parabolic rise took off. Price should eventually return to the yellow zone to correct the excesses of what is now a full-blown mania. How manic is it? Friday, the company announced a buyout of Whole Foods Market (WFM) for $13.7 billion in cash. That day, the herd was so in love with anything Amazonian that they pushed the company's valuation higher by $13.8 billion. This effectively allowed Amazon not only to gobble up Whole Foods for free, but also to gain an additional $100 million for its genius.
That's epically optimistic, and likely the terminal manifestation of the herd's love affair with this name. The clue of parabolic stall will grow louder once the news of the Whole Foods acquisition turns from one of genius to one of risk. When the stories turn from how much sense the purchase makes to how much weight Whole Foods is going to put on the valuation and earnings model, and how the pure play in technology now has the stench of low-margin grocery on it, it'll be too late to jump off the camel, as the back will have already broken. When this becomes the crowd's new awareness, share price should no longer be anywhere near $1,000. As the chart above shows, price will likely be well on the way to the minimum target zone of $700 +/-50.
From an Elliott Wave perspective, all of the required wave internals are present, with blue wave (5) completing in this price and time zone. June's all-time highs reached the upper 3 standard deviation band (using daily bars; not shown here), which controls 99.7% of normality. However, the drop of the past week, testing $925, significantly damaged the technical condition of the price structure. The rise after the Whole Foods buyout double-topped Monday, before closing near the low of the day, 20 points off the high.
The critical support for the bullish continuation of the parabolic rise is now established at $925. Closing under this level will cause our DSE (decision support engine) to issue a multifaceted sell signal, pointing toward $700 +/-50 quickly. Members of our live-market Trading Room and DSE Alerts services (click here for free trial) were informed, as the $1,000 level failed to hold prices up, that a change in trend direction of the largest degree in Amazon's history was imminent.
While $925 is critical support, those investors with massive profits should consider using sell-stop orders to protect those gains at the $950 level. If not already long AMZN, the DSE warns that now is neither the price nor the time to buy, or even hold, these shares. If so inclined, short exposure can be established upon a close under $950, too, using any new high thereafter as buy-stop protection.
The market is the ultimate judge and jury, and the verdict is still out. However, reasonable doubt in the continuation of the parabolic rise will come if $925 breaks, and the bull's demise will be certain upon a break of $700.
WES Price at posting:
$40.16 Sentiment: Buy Disclosure: Held
(20min delay)