Chart of the Day: Amazon Facing Risks Despite Positive Economic Indicators

Elon Musk has reiterated warnings since Oct for the Federal Reserve "to cut interest rates immediately" or risk "amplifying the probability of a severe recession." Yesterday, I provided a severely bearish call on Tesla (NASDAQ:TSLA).

Today, I will discuss Amazon (NASDAQ:AMZN), whose founder and former CEO Jeff Bezos also warned consumers and small-business owners in November to save their money ahead of a likely recession. What is interesting about this advice is that it goes against the behemoth retailer's interests. Amazon has already suffered steep losses in its third quarter 2022 earnings, with its operating income decreasing to $2.5 billion and its net income dipping to $2.9 billion. Following Bezo's advice, Amazon began laying off 10,000 employees.

Nevertheless, BOOX Research argues that yesterday's CPI print falling to 7.1%, lower than expected, its second consecutive decline, slumping to an 11-month low could boost Amazon's stock. However, I'm more inclined to think this is quiet before the economic storm.

Mixed signals continue to perplex retailers as the end of the year approaches, and a new one begins. While the economy is poised for a fall, U.S. consumer spending remains strong—and so does the labor market. Still, despite those figures, the Conference Board predicted a 96% chance of a recession in the next 12 months.

The National Retail Federation predicts that November and December retail sales will grow between 6% and 8% over 2021, despite savings accumulated during the pandemic beginning to shrink. In addition, credit card balances rose 15% YoY in Q3, the largest increase over 20 years. These factors indicate that retailers will face a turbulent environment in 2023, much like they did during the 2008-2009 Great Recession.

Let me show you how all these ideas meet in one precise data point.

Amazon topped out with an H&S top, ending its bull market. After reaching the pattern's target, the price formed another H&S of the continuation variety. Its head found resistance precisely by the deadline of the H&S top. When the second H&S completed, with a downside breakout, the 50-week M.A. crossed below the 200 WMA, forming a weekly death cross for the third since launching on May 15, 1997.

The last time a price set of 50 weeks dipped below the price of 200 weeks was in 2006. The first time was in 2001. The price fell about 90% between May 2000 and Sep 2001.

The H&S Continuation pattern implies a $65 target. On Oct 31, I made that call when the stock was trading at $103.41. The price is now forming a new pattern, a Descending Triangle, which, according to my mentor Ralph Acampora, "the Godfather of Technical Analysis," is probably the most reliable pattern, as it visually demonstrates a consistent bearish advance.

The triangle will complete upon a downside breakout. Meanwhile, bulls attempted twice, including this week (yesterday) - even after the positive CPI that some argue should buoy Amazon - but failed to maintain the weekly price above the pattern.

The triangle's implied target will not extend that of the preceding H&S. However, the pattern reinforces and confirms the downtrend.

Trading Strategies

Conservative traders should wait for the price to close below $85, a 3% filter, and wait at least three days to ascertain the price remains below the pattern, then wait for a return move to retest the triangle's resistance - before attempting a short.

Moderate traders should wait for an intraday penetration below $86 and a two-day filter to avoid a bear trap. Then, they could wait for a throwback for a better entry.

Aggressive traders could short a retest of yesterday's high or enter a long contrarian position amid a return move to the H&S continuation pattern if the price closes above $98.

Trade Sample 1 - Aggressive Short

• Entry: $96
• Stop-Loss: $98
• Risk: $2
• Target: $90
• Reward: $6
• Risk-Reward Ratio: 1:3

Trade Sample 2 - Aggressive Long

• Entry: $96 (After closing above $98)
• Stop-Loss: $94
• Risk: $2
• Target: $106
• Reward: $10
• Risk-Reward Ratio: 1:5

Trade Sample 3 - Short Follow-Through Sample 2

• Entry: $108
• Stop-Loss: $110
• Risk: $2
• Target: $88
• Reward: $20
• Risk-Reward Ratio: 1:10

Disclosure: The author does not own any of the securities mentioned in this article.