The AMZN Charts Promised

I already had a short position in AMZN started, was at a small position loss of 1.8%, but that's only about -0.30% of portfolio on a position that accounts for about 7-8% of portfolio value with margin, without margin closer to 15% so a loss of 3/10ths of 1 percent is well within my risk management guidelines of no 1 position losing more than 2% of portfolio value at the most and often less than that (1%). If you control risk, you just need to play the probabilities and you will get there. If you let risk get out of hand or you take sub par trades (low probabilities), given enough time it will catch up to you.

So while this position accounts for nearly 15% of portfolio before margin, the risk accounts for less than half of 1%, how do we accomplish this? First we have a risk management plan, you can read more about the basics I use right here and it is linked at the top right of the site for you to review anytime.

Second we don't chase trades, the more you chase a trade the more risk you are adding, the less profit potential and the lower the probabilities. We look for trades and then let them come to us on our terms, we get them for better prices, less risk and higher probabilities and if they don't come to us on our terms, there are 10+ thousand other choices. Make it easy on yourself, be picky, be patient.

Here's what I like about AMZN and why I decided to add to the short today even though I think there's a chance of a little better entry...

 AMZN Daily chart with a Linear Regression Channel. The first channel buster in late April/early May did not lead to a change in trend which they often do. The second channel buster did what a downside break often does, it moved back to kiss the channel good bye, this is why we don't chase because if you shorted AMZN on the break of the channel, there's a very good chance you'll be shaken out on a move back up to kiss the channel goodbye, you see the trade set up, wait for an opportune time and enter on your terms. By the time you entered a short on the break of the channel, you'd have at least 8% draw down on the kiss of the channel, many people set stops at 8% - an old IBD suggestion that many traders follow although it's completely arbitrary; an 8% correction in AMZN is more serious than an 8% correction in say MCP, in MCP the Beta is nearly 4 times more than AMZN so a normal, ordinary run of the mill correction in MCP would be a substantial move in AMZN.

This is one of the reasons I created the Trend Channel as it is specific to each stock it is applied to and will tell you when the correction is out of character and likely to lead to a change in trend.

Also note the declining volume in AMZN, although most of the market is the same way, a healthy up trend should see expanding volume, not contracting. Look at the SPX bull market rally's volume from 20003 to about 2006 just before the volatility got out of control which is a warning of an impending top although at the time it looks very bullish. Volume expanded and that timeframe was the easy money, the trend, after that it was a lot of volatility and exit at the wrong time and you could end up wasting a year of opportunity cost for an extra 7% which could have been made in certain stocks in a day.

Then look at the volume for the SPX from 2009 to present, although price is significantly higher, it is not higher in a healthy way, it is higher because of QE programs and manipulation of sorts by the Central Bank.

 I'm using my Trend Channel here, the first custom indicator I received an award for and I'm being VERY generous by using a 5-day chart, but even on such a wide chart the channel can tell when the stock's character is changing and it gave a Buy to Cover signal at the white arrow, then after a long trend it gave a sell signal at either of the red arrows to the right. Hanging around after the TC gives a signal often is just sitting through extraordinary volatility for a measly additional gain if you can even get that. Once probabilities are no longer on your side, having an open position like AMZN after the stop out is really just pure market risk with low probabilities of any significant gains; your money is exposed to market, sector and stock risk with no good reason. If my money is in the market, it's there because there's a good reason, even in a defensive or low Beta stock, the market can easily dip 20% in a matter of a week.

 Using a very generous 9-day chart with a 50-bar moving average (450 day), it holds most of AMZN's tend from 2009, but few people have the stomach to sit through the daily volatility that long. Note also I've added Relative Strength to the lower window, not Wilder's RSI which compares price in one asset to itself, but RS where price is compared to another asset and in this case I compare AMZN to it's own Sub-Industry group of 17 stocks including names like EBAY, OSTK, STMP, DANG, LNTA, BIDZ, etc and AMZN performs poorly with weakening RS vs its own peers.  Note volume as well.

 On the same 9-day chart in yellow to the left, the tall upper wicks on the candles indicate higher prices are tested and fail, there's resistance there and AMZN turns down for the rest of the year. At the orange arrow AMZN sees a pullback that remains within the tall candle body, then a series of higher highs/higher lows continues the trend and another noise candle or pullback at the next orange arrow creating a hammer (support) and at the next green arrow another series of higher highs and lows continuing the uptrend, at the red arrow we see a noise candle that fails to make a higher high and low and then a series of candles making lower highs and lows (a down trend). The current two candle pattern is just shy of two different downside reversal candle set ups. Look at the candles on other charts like 5 day or monthly and you'll find different, but useful information, the 9-day choice here was completely arbitrary.

 The daily 3C chart shows heavy distribution in to higher prices as is usually the case, however the leading negative divergence is well below 3C's position back at the 2009 lows, with price this elevated and 3C so low with so little underlying flow support, AMZN is literally like walking out on a thin ledge and hearing cracking sounds. You'll also notice like any other major divergence (positive or negative) it started with a relative divergence and led to a leading negative, a leading divergence is more powerful than a relative divergence.

 The 2 hour chart is a VERY significant timeframe and trend for 3C, you can see some accumulation at white arrows, distribution at red and confirmation of the trend at green. The recent price highs saw a leading negative divergence (red box( and if you compare price at the lower yellow line and price at the upper yellow line, 3C should make similar higher highs, instead it makes a lower move to a lading negative divergence. Bottom line, there's distribution in AMZN on significant timeframes.

 30 min chart locally from the 11/16 rally shows initial confirmation, then a leading negative divergence in to higher prices until there's not enough support to push AMZN higher and it moves to a lateral range/trend as distribution continues.

 Finally I'll just use the 15 min chart with no drawing on it, the negative divergence between price and 3C should be clear, if 3C was confirming the strength of the trend it would either be making the same higher highs as price or even leading price to the upside, it is below the 3C readings when the rally first started on 11/16, yet price is significantly higher. This in essence tells us there's less underlying money flow support up here than there was at the lows of the 16th, a dangerous area for AMZN bulls.

I could add more charts, but I think I've established the negative character of distribution in AMZN though multiple timeframes.



 Now working from the fast intraday charts that don't carry the same weight or implication as the longer charts above, but are good for intraday movement and tactical positioning once you have a strategic plan. What we see here is in the short term every time AMZN rallies there's a negative divergence, this suggests either institutional money or more likely market makers (I know AMZN uses market makers rather than specialists because of the 4 letter ticker that is unique to NASDAQ stocks) are preparing their inventory for a move in AMZN, lightening up on their long holdings so they can (if they have to) purchase shares at market if there are no other buyers and since up to 30% of a stock's volume can be a market maker trading their own account, this could also be them selling short or selling naked short which they can do because of their market maker status.

Most of the time with large orders, smart money will use the stock's market maker or specialist for NYSE stocks to fill their order because these middle men specialize in the stock and know it and its players better than anyone, this they can usually get the best fill on the order, but they also know what is coming if they filled a large order so they will prepare their own accounts and often the 1 min chart shows that, even in intraday moves that it calls.

 So I like AMZN short for a variety of reasons, I don't have the time to watch AMZN all day for the very best entry as it's more important that I am paying attention to what is most beneficial to all members so I decided to fill out the short position now even though this range is pretty obvious to Technical traders and they likely piled their BTC orders just above the range and limit buy orders just above the range with sell orders just below the range and sell short orders just below the range.

For HFT's, algos. market makers, even hedge funds, hitting those stops and orders creates a lot of volume which they can use to ill their own orders at better prices with more supply or demand available to them. They can also make money on the increased volume w/ regard to the bid/as spread and finally they make money on order flow through volume rebates. There are a lot of reasons to run a stop hunting expedition or a head fake move, which include adding to reversal momentum as well as the other things mentioned above.

If there's a move above the range, feel free to email me and we'll make sure there's distribution in to such a move, it gives you an even better entry for a short with less risk.