It has become a habit for Amazon stock to defy gravity. The stock’s phenomenal rise makes fundamental value metrics like price to earnings or price to book seem obsolete. AMZN‘s current price of $1194 divided by last year’s profit per share of $4.90 gives the stock a trailing P/E ratio of 244. For your information, the average stock is considered to be overvalued if its P/E exceeds 25. Despite all that, Amazon stock shows no signs of stopping as investors and speculators continue to believe in Jeff Bezos’s ability to keep his creation growing.
However, no trend lasts forever and we doubt Amazon’s uptrend will. But since we obviously cannot rely on fundamental analysis to guide us when it comes to Amazon stock, let’s check if the Elliott Wave Principle has a solution.
The daily chart of Amazon stock shows that the rally from the low of $474 in February 2016 to the all-time high of $1213 could be seen as a complete five-wave impulse. Assuming the preceding decline was wave (2), this rally fits into the position of wave (3). According to the theory, every impulse is followed by a three-wave correction in the opposite direction. In Amazon’s case, this means wave (4) down could be expected, as soon as wave 5 of (3) ends. In order to get an idea of wave (4)’s depth, we need to draw a trend channel through the highs of waves (1) in (3). Fourth waves typically would slightly breach the lower line of that channel, so it makes sense to prepare for a pullback to the area between $1050 and $1000, which should provide another chance for the bulls to regroup before attacking $1300 in wave (5).
In conclusion, a significant correction seems to be just around the corner for Amazon stock, but instead of rushing for the exits, the bulls might want to take advantage of it by “buying the dip”. $1300 would is still be a viable target.
