Daily Archives: November 4, 2015


Speculation: The Excesses of AMZN

NOVEMBER 4, 2015

Shares of Amazon have surged well over 120% in just the last ten months. It’s rarely our philosophy to bet against a trend, and it’s almost never a profitable endeavor. Nonetheless, it’s hard to ignore the similarities between the current price action in Amazon and the “blow-off top” that Apple created in 2012.

BUMP AND RUN REVERSAL (BARR) is a reversal pattern that is designed to identify speculative advances that are unsustainable for a long period. There are three main phases to this pattern:

  1. Lead-In Phase. The first phase forms the basis from which to draw the trend line. During this phase, prices advance in an orderly manner and there is no speculation.
  2. Bump Phase. The “bump” forms as shares sharply advance, with prices moving further away from the lead-in trend line. The angle is typically 50% greater than the angle of the lead-in trend line. It is important that the bump represent a speculative advance that cannot be sustained for a long period. To validate the level of speculation, the distance from the highest high of the bump to the lead-in trend line should be at least twice the distance from the highest high in the lead-in phase.
  3. Run Phase. After speculation dies down, prices begin to peak and form a topping pattern. The “run” phase really begins when the pattern breaks the trend line support. Once the break occurs, the run phase takes over and the decline continues. Since prices rise very fast to form the bump, the subsequent decline can be just as ferocious.

Apple in 2012: An Example. From 2009 – 2012, shares of Apple formed a well-defined uptrend (lead-in) that was tested and held as support on multiple occasions. In early 2012, price began to expand exceptionally fast, just about doubling by September ($50 to $95). By September, shares had formed a significantly steeper “bump” trend line and had also created a negative RSI divergence – meaning a higher high in share price with a lower high on the RSI (a measure of momentum). Once the “bump” trend line broke, shares fell in an almost unbelievably dramatic fashion, losing nearly 50% of its value in just six months.

AAPL

Amazon in 2015. Shares of Amazon formed a very well-defined uptrend over the course of six years, with multiple tests of the trend line. In early 2015, shares began to speed higher. Price hit $290 in January, and this morning touched the $646 level – a 125% increase in just nine months. Similar to Apple, price has formed another much steeper “bump” trend line and has now formed a potential negative divergence with RSI (higher high in price with lower high in RSI). Now, we say potential because a reversal has not yet occurred. It is possible that share price continues to accelerate higher and actually reach a higher RSI level.

AMZN

The level of speculation and bullish energy in Amazon right now is clear everywhere you look. From a fundamental standpoint, shares are trading at a 930x PE (yes… 72x Apple’s PE and even 26x Google’s PE). That often gets explained away as “they’re reinvesting in the business”. Even Stanley Drunkenmiller yesterday said that Amazon is a great buy because Jeff Bezos is a “serial monopolist.” But that’s not the point. The fundamentals are often lead by the technicals. In fact, during Apple’s peak, we saw the same type of investor sentiment. The iPhone 5 had just been released and Apple could do no wrong. But it’s decline in share price forecasted declining EPS roughly six months before it was actually reported in their quarterly earnings.

We are not involved in this name yet. Once (we should really say “if”) shares do end up forming a topping pattern in the next several weeks, it may prove to be a uniquely profitable trade on the bearish side for 2016.