Amazon: A Prime Trade, Not A Prime Investment (Technical Analysis)

Summary:

• Amazon’s short-term technical outlook is strong, with bullish signals from chart patterns, moving averages, and indicators, making it a buy for traders.
• Intermediate-term analysis shows mixed signals with some negative divergences, suggesting caution but overall resilience in the stock’s performance.
• The long-term outlook is uncertain due to Amazon breaking below a long-term uptrend, despite positive moving averages and some bullish indicators.
• Strong earnings and modest undervaluation based on P/E and P/S ratios make Amazon a prime trading opportunity, but only a hold for long-term investors, as monthly technical analysis shows uncertainty.

Thesis

Amazon.com, Inc. (NASDAQ:AMZN) stock has recently made all-time highs, but is the stock ready to continue to surge higher? From my technical analysis below, I determine that the short term is the strongest for Amazon, as the outlook dims when looking at an increasingly longer time frame. The monthly analysis shows that there is uncertainty with Amazon stock as it has fallen out of the long-term uptrend. As for the fundamentals, I believe earnings were strong as they beat expectations while the valuation is slightly below fair levels in my view as current growth rates likely justify a slightly higher P/E ratio. Overall, I conclude that Amazon is a buy for traders that are looking at a shorter time frame, while it may just be a hold for longer-term investors as the outlook gets more uncertain as we zoom out.

Daily Analysis

Chart Analysis

In the middle of the year, Amazon broke below a key short-term uptrend line. The stock seems to have entered into a channel that is sloping upward, but the breakdown is still a sign of weakness. The only source of resistance currently for Amazon would be the former uptrend line, and is now the upper channel line. It is currently at 208 and rising, showing that the stock can advance even if it remains under this line. The nearest level of support would be at the psychologically important 200 levels, as that price zone was key resistance back in July. Moving down, we also have support in the high 180s as that zone was resistance in April, May, June, July, and October, demonstrating its high significance. Next, we have the new uptrend line and lower channel line that is moving into the high 180s and rising fast and will be likely key support in the future. Lastly, we have support at 180 as that price level was strong support in July and October. Overall, despite some weakness with the break below the uptrend in the middle of the year, I believe everything else looks quite good in the daily chart.

Moving Average Analysis

There have been no crossovers between the 50-day SMA and the 200-day SMA in the past year, with the 50-day SMA remaining on top. After a significant narrowing since August, the gap is starting to widen again, showing the resurgence of bullish momentum. The stock is currently trading quite far above the MAs with the 50-day SMA’s support at only 187. For the Bollinger Bands, the stock is currently above the upper band, making it overbought. It has been consistently at the upper band since the beginning of the month, showing that although it is overbought, there is also sustained bullish momentum as well. The 20-day midline is the nearest MA support level for Amazon, as it is at 192 and rising. From my analysis, the daily MAs show a bright picture for the stock as the recent bounce of the 50-day SMA nullifies any weakness.

Indicator Analysis

The MACD is currently above the signal line after it crossed above it in late October, a bullish signal. The gap between the lines continues to widen, showing that the bulls have been relentless as of late. For the RSI, it is currently at 68.8. The RSI was below 50 for sometime in October, but the reclaiming of this critical level shows that the bulls have wrestled control of the stock from the bears. Note that the MACD and RSI both confirm the latest run to all-time highs, as they both have hit basically the highs of the past year as well. Lastly, for the stochastics, the %K and %D are at the same level currently but the worsening trajectory of the %K line could mean that a bearish crossover within the overbought 80 zones could be imminent. Investors may want to monitor this indicator to see if the crossover actually occurs and if the gap between the lines widens or not. As a whole, I believe this daily indicators analysis has been net positive, as the bullish signals outweigh the negatives here.

Takeaway

The short-term technical outlook for Amazon is strong, as all three daily analyses were net positive for the stock. The chart showed that despite breaking down from an important uptrend line, the stock has developed an upward channel. The moving averages are regaining strength and lastly, the indicators are also mainly positive.

Weekly Analysis

Chart Analysis

The weekly chart is another positive one for Amazon. The stock is bound within an upward channel that should provide healthy gains, even if the stock remains within it. The upper channel line is the only source of resistance, but again, it is rising fast. The nearest level of support would be in the high 180s, as that area was heavy resistance back in 2021 and was also resistance earlier this year. Next is the lower channel line that is sloping upward quite quickly. This line will become key support in the near future as it overtakes the 187 mark. Moving down, we also have support in the high 160s, as that level was strong resistance in 2020 and 2022 and was support multiple times this year. Lastly, the high 150s is distant support, but it was strong support back in 2021, reflecting its importance. Overall, I believe it is clear that the weekly chart is a highly positive one, as there is not much to complain about here.

Moving Average Analysis

The 13-week SMA has just regained the 26-week SMA after falling below it earlier this year. This is a very important signal as it shows the bulls have been highly resilient. The strong upward trajectory of the 13-week SMA will likely result in a widening of the gap between the SMAs. The stock is currently far above both SMAs with the SMAs support being only in the mid-180s. For the Bollinger Bands, the stock is currently beyond the upper band, showing that it is quite overbought. As you can see, in the past, pullbacks have followed surges above the upper band, and so we can expect Amazon to pull back a bit after the latest strong rally. The reclaiming of the 20-week midline in recent months is another bullish sign that the uptrend will continue. In my view, this weekly MA analysis has been positive as it shows the bulls are back in control after a brief weakness.

Indicator Analysis

The MACD just crossed above the signal line, a bullish indication. However, we have some negative divergence with the MACD here. While the stock has made all-time highs recently, the MACD has been quite suppressed as it remains well below the highs seen earlier in the year as well as during the 2020 and 2023 peaks. There is also some divergence with the RSI as it remains below its one-year-high and also levels seen in 2020 and 2023 as well. These divergence signals are potential red flags that investors should continue to monitor, as they could signal early weakness in the uptrend. Lastly, for the stochastics, the %K is above the %D after a crossover earlier in the year. The %K has bounced off the %D multiple times in the past months, showing that the bulls have been relatively resilient. Overall, while there were some nearer term bullish indications, the negative divergence takes the spotlight here and investors should practice caution with Amazon stock.

Takeaway

I would say that the overall intermediate term technical picture is still a net positive one, despite some potentially concerning signals. The chart remains very strong as the stock is bound in a bullish channel. The moving averages show that the bulls have been resilient. The indicators, however, are a bit worrying as there are signs of negative divergence that could indicate the stock is not as strong as it seems. That said, there were also some bullish signs in the indicators as well. My judgement here is that the intermediate term still looks satisfactory overall, but the divergence needs to be monitored to see if it continues to worsen in the near future.

Monthly Analysis

Chart Analysis

Note that the above chart is on a logarithmic scale to better show Amazon’s long-term trend. The stock actually remains below the former uptrend line after breaking below it in late 2021. That uptrend line dates back to 2008 and so it was very important for the stock. Therefore, the long-term support for Amazon is quite minimal currently. The stock has held up quite well despite the breakdown, but it is also quite far from reclaiming the uptrend line, making the long-term outlook for Amazon a bit uncertain. Although it is miles down below the stock, the nearest long-term support level is likely at around 100 as that level was proven significant from 2018 to 2020. Overall, I find this monthly chart to be quite uncertain, as it seems that the stock is drifting out.

Moving Average Analysis

The 6-month SMA and 10 month SMA had a bullish crossover back in early 2023 and there has been no crossovers since. The gap between the two has narrowed a bit since the middle of the year, showing a moderate decrease in long term bullish momentum. The stock again trades far above the SMAs with the 6-month SMA still quite far below. For the Bollinger Bands, the stock has not yet reached the upper band despite the latest rally, showing it is not yet overbought and has room to run further. Amazon has not dropped below the 20-month midline since reclaiming it in early 2023, a signal of strength. In my view, despite some slowing of the 6-month SMA, the monthly MAs remain net bullish as there has not been any long term bearish signs for over a year.

Indicator Analysis

The MACD is currently above the signal line after a bullish crossover back in early 2023. The MACD’s trajectory seems to improving after the gap between the two lines narrowed in the middle of the year. As shown in the histogram, the gap is now widening again, showing the resurgence of long term bullish momentum recently. However, there are also some signs of bearish divergence with this monthly MACD as well. The stock is at all-time highs, but the MACD is still below levels seen in 2020. The divergence here is not as severe as in the weekly analysis, but is still noteworthy. For the RSI, there is more significant divergence, as the current reading of 70 is far below levels seen in bullish periods from 2013 to 2020. Again, these divergence signals should not be ignored and investors should proceed with caution. Lastly, for the stochastics, the %K recently crossed above the %D, a bullish signal. Note that the stochastics has remained above the 80 zone since mid-2023, showing that there has been sustained bullish momentum. As a whole, I would say the indicators are a bit worrying, as the divergence signals overshadows some of the more positive signals here.

Takeaway

In my view, the long-term technical outlook for Amazon stock is a bit more mixed relative to short and intermediate terms. The chart shows the stock remains below a long-term uptrend line that was broken in 2021, showing that there is some uncertainty in the longer run. The moving averages are more positive since while the 6-month SMA’s momentum has decreased a bit, there still has not been bearish signals yet. As for the indicators, as discussed above, there were positive signals, but divergence signals are red flags that should not be ignored.

Fundamentals & Valuation

Earnings

In late October, Amazon released their Q3 earnings and showed generally strong results. For revenue, they reported $158.9 billion, an 11% YoY increase. The all important AWS segment saw revenues grow 19% YoY to $27.5 billion. For EPS, they reported $1.43 versus $0.94 in the prior year period. Both revenue and EPS beat expectations as revenue beat by $1.59 billion while EPS beat by $0.29. Other highlights in their earnings report include free cash flow being up from $21.4 billion to $47.7 billion YoY and operating income being up from $11.2 billion to $17.4 billion YoY. Overall, I would say Amazon’s earning were very respectable as they beat expectations. However, as you can see in the chart above, revenue growth remains sluggish relative to historic standards and EPS growth, while still high, is below peak levels seen in 2023.

Valuation

The P/E ratio is at 5 year lows, while the P/S ratio has rebounded a bit from the 2023 lows. The P/E ratio is currently at 43 after being over 120 as recent as in mid-2023. On the other hand, the P/S ratio is at 3.6 after being as low as 1.8 in early 2023. The P/S is still significantly below the five-year high of over 5.0 in 2020, however. When comparing the P/E ratio to the EPS growth chart above, you can see that Amazon is currently undervalued since the multiple has dropped to 5 year lows while EPS growth remains far better than levels seen in 2022. As for the P/S ratio, when you compare it with the revenue growth chart above, you can see that the stock is more fairly valued. For example, the P/S ratio is currently at levels seen in early 2022. The current revenue growth rate is also very similar to one seen in early 2022, showing that the current stock level is accurately reflecting the growth in revenue. When considering the P/E and P/S ratios together, I would conclude that Amazon is moderately undervalued at current levels, with its growth deserving more recognition.

Conclusion

The short-term analysis showed by far the strongest outlook for the stock, with all three of the analyses being bullish for the stock. Things start dimming a bit when looking at the intermediate term as there were signs of negative divergence creeping into the indicators. Lastly, the long term is the most uncertain, as the stock is no longer in the uptrend that has been in effect for the majority of the past decade. For the fundamentals, results remain strong as there is still quite healthy growth. From the P/E and P/S ratio analysis, the stock also seems modestly undervalued currently relative to its results. Therefore, after looking at the technicals and fundamentals, I conclude that Amazon is a prime bullish trading opportunity but only a hold for longer-term investors as the shorter term is much more certain and stronger than the long term.

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Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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