We last wrote about Amazon late last year, on December 22nd, 2022. The stock was trading below $87 a share, down more than 50% from its 2021 record high. The crash could be explained by both macro and company-specific factors. The macroeconomic side of the story revolved around the rapidly rising interest rates in response to high inflation, which threatened to plunge the economy into a recession.
If that wasn’t enough, revenue growth at Amazon was slowing just when the company ramped up its capital spending. This led to negative cash flows at the company precisely when dark clouds seemed to be gathering over the economy. Inflation was the highest in 40 years and there was no end in sight to the Fed’s efforts to tame it. Understandably, most investors thought the worst was yet to come.
Elliott Wave analysis, on the other hand, doesn’t rely on backward-looking economic data. It focuses on what the market itself is telling us through the price patterns it draws all the time. Here is how it convinced us that Amazon stock was a ‘buy’ while everyone else was bearish in late-2022.
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Amazon ‘s daily chart revealed that the structure of the decline from $188 was corrective. We labeled it as a W-X-Y double zigzag, where wave X was an expanding flat. According to the Elliott Wave theory, once a correction is over the preceding trend resumes. Amazon was obviously in an uptrend prior to July, 2021, so it made sense to expect a recovery as soon as wave Y ended.
That didn’t take very long. AMZN started rising as soon as the calendar turned on 2023. As of this writing, the stock’s year-to-date return stands at 61%, easily beating the S&P 500’s 17%. Relying on what the economists were predicting would’ve caused us to miss out on most or all of those gains. Fortunately, Elliott Wave analysis helped us catch a good chunk of it.
$81.43 was the best the bears managed to achieve on January 6th, 2023. Eight months later now, the stock trades above $137 a share after exceeding $143 in August. Now, almost everyone is bullish on Amazon again. The Fed seems poised to leave rates unchanged for the rest of the year and economist widely expect a soft landing for the US economy.
We sold our position at $131, though. Whether the 2023 rally evolves into an impulse has yet to be seen. So far, it is a three-wave structure, marked 1/a-2/b-3/c. The recent weakness might be wave 4 or the beginning of a much bigger decline. In both cases, we think the easy money has been made already in the mid-term. And by the way, we believe a recession is still very likely to begin sometime in 2024. Consumer-oriented companies like Amazon would likely find themselves vulnerable once more.
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