- Amazon has started to fall.
- It could drop to $600 levels in a worst case scenario.
- The QQQ is a low volatility option for those who want to play the Amazon drop.
Amazon.com Inc. (NASDAQ:AMZN) has begun its descent. Blame it on whomsoever you want. Some use Trump or sector rotation. However, I believe that this market forecasting has gotten out of hand. You need to see what is actually happening in the chart rather than guessing what may or may not happen. What is happening on the chart is a descent. Now how far will it go? No one knows, but we can have key levels and key areas to be aware of. Now, this does not mean the AMZN stock has to go to these levels, but an observation is worth it. (See also: AMZN Stock: Trump's Policies Could Actually Help Amazon.com, Inc.)
Take a look at the chart below.
(Source: Yahoo Finance)
This is a head and shoulders pattern, a classic topping pattern. You can see I have drawn the left shoulder, right shoulder and the head. The horizontal line represents the neckline. It is not precise, and it does not have to be. You can see that Amazon stock price has broken the neck line and is hovering around the $740 level (as of Nov 11 close price). Because this is a very obvious pattern, many investors are watching this level and it could lead to a continued self-off. If I measure the head to the neck line, that is approximately a 100 point drop. Projecting from the neckline which is at $750, the first potential drop target is around $650. This level is the top of a previous earnings gap, which is the $650 level.
If the AMZN stock price falls to that level, we have another interesting scenario on our hands. Gaps tend to act as magnets for the price. The closer the price gets to a gap the higher the probability of filling a gap. If you recall election week, you will know how price moved violently to fill all the gaps that were created. Thus, Amazon falling to at least $600 level is not out of question.
Don't be surprised on how quickly this may happen due to the volatile nature of the stock. It is this volatility that may make it difficult to directly invest in Amazon. Since Amazon has been leading this market rally, a safer way to play the descent would be through the Nasdaq ETF, QQQ. (See also: AMZN Stock: Amazon.com, Inc. Set To Take Significant Market Share From Alibaba)
If we look at the chart of the QQQ, notice how it is forming the same pattern. However, the QQQ has not broken its neckline yet. If Amazon continues to fall further, then it will drag down the rest of the technology stocks, which will lead to a sell-off in the QQQ. Because the QQQ is a basket of stocks, it will fall, but not to the extent that Amazon will. If we assume that the QQQ will fall to its head and shoulders projection, the potential drop is from 115 to 110, a five point drop. The drop is much shallower and safer on an average person's wallet compared to a 100 Dollar spike in Amazon. While the correlation is not perfect, the volatile reaction last week was a perfect example of the dynamics between Amazon and the QQQ.
(Source: Yahoo Finance)
Does this scenario of Amazon dropping have to occur? No. However, since the tendency is currently downward, my focus is on potential support levels. If market dynamics change, my view and analysis will change accordingly.
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