Is the longest running river in the world drying up? In short, we don’t see that as the most likely outcome. In fact, the upside could be substantial for Amazon (NASDAQ:AMZN) stock. Granted, if you were to peruse all of the narratives being proffered to willing readers, it’s quite possible you would soon fill up with doubt. You may be hearing that the figurative tributaries that feed the main flow are slowly ceasing. There’s innuendo and allegation as well as outright negativity.
Alongside these pessimistic prognostications is positivity. The company is buying back their own stock with a new $10B program. I might insert here a simple fact: That’s less than 1% of the outstanding shares. Not likely enough to move the needle. But it does add to the narrative. And don’t forget the 20-for-1 stock split. Oh, the stories that will spawn…
As humans, we seem to gravitate toward a narrative. Why is that? Narratives spark thoughts and evoke emotions. They draw the person in to a storyline that they wish to continue to follow. Now, granted, not all narratives are misleading or harmful. Most are well intentioned and the author likely believes in what they are offering to listeners. As well, we seem to enjoy narratives.
Should you base your investment decisions on narratives? Let’s follow that up with another query. Do you believe that news moves the market? That’s a loaded question, to be sure. It would likely give rise to a spirited and heated debate between dueling pontificators, equally convinced of their own rightness. Let’s save the dogma for another day.
Please allow me to propose the following. News is a product of sentiment. What does that mean? Fear vs. greed. Emotions in motion. The overriding social mood of the masses is what actually produces the news. As well, waves of competing optimism vs. pessimism are constantly pushing against one another. That’s what makes a market! These waves produce forms or structures via price. Over time, the forms repeat and can therefore be predicted.
Hogwash! Poppycock! Blasphemy! Or, insert your favorite incredulous interjection instead. If you’ve read our articles before or reviewed our work then you know that we use Elliott Wave theory to track and project what’s most probable to happen next in stocks and/or the market itself. Our multi-year track record speaks volumes as to its efficacy and utility.
AMZN is an excellent study in how sentiment is the main driver of its stock price and the market of which it is a part of. We do not affirm that fundamentals do not matter. Of course they do, just not how the masses perceive them to be. In fact, AMZN is a perfect manifestation. For how many years was fundamental analysis unable to explain in a satisfactory manner it’s meteoric rise? From a fundamental standpoint the company was so overvalued that standard metrics could not quantify it.
However, sentiment could be tracked, measured, and even projected as to what was most likely to take place. Let us not delve further into the “why” of sentiment just now. Rather, we can observe the structures of price formed by sentiment and then use this to show us what is coming for AMZN. As well, we will have an alternative scenario should our primary expectation not play out as drawn up.
The fundamental theory behind Elliott Wave is that advances during a bullish phase unfold in 5 waves and corrections form 3 waves. Please note the weekly chart here that shows AMZN since it’s inception. You will note some key Fibonacci price levels that have been struck on the way up and down. We call that Fibonacci Pinball.
For some years now we have used Fibonacci Pinball to guide our analysis via Elliott Wave theory. Pinball provides us with specific targets as well as warning levels when to become protective, or even shift our stance to neutral, or outright bearish, a stock or the market itself.
In the case of AMZN we recently had been looking for the $2,700 level to hold. Note the next chart showing those key levels and potential upside. When we zoom in to this scale, we can see that there have only been 3 waves up from the low that is marked as wave (4). A typical target for the 3rd wave of a 5 wave advance is the 1.618 extension of the initial wave 1 and 2. Thereafter, a pullback will usually hold the 1.00 extension. So, you can see why we are counting this current advance as shown.
It’s our primary projection that $2700 may indeed be a key and pivotal low and we are anticipating a move up to the $3300-$3400 level for wave circle ‘i’ of 5 of (5) of a larger circle ‘3’. Why all the alphabet soup?
Elliott Wave produces structures of 5 waves up and 3 waves down on all scales. We express this as self-similarity of structure. All of the advances from an hourly chart to daily to weekly time frames will exhibit these same forms at all scales. That is what gives Elliott Wave it’s power. Crowd behavior repeats on all time frames.
Now, if you are looking for a narrative as to “why” this happens, you may be searching for a long while. Suffice to say that these structures have been observed for decades in the market of stocks that we study. I’m not talking tinfoil hat stuff here. This is just how humans are hard wired. Their behavior, en masse, can be tracked using Fibonacci math via the structure of price. In fact, Fibonacci is the fabric from which Elliott Wave is crafted.
So, should our primary scenario track as traced here, we will see another 5 wave structure unfold from the $2,700 low. In the next several months, AMZN will likely strike the $4,500 level. However, should it instead drop down to $2,400 and follow through under $2,234, then this primary scenario would require revision. It could even mean that AMZN has indeed run dry for now and will trace out a much deeper pullback to as low as the $1,265 area. But that is not what the structure of price is telling us today. We will therefore stick with our primary projection until it is proved invalid.
This is not to say that we’re talking out of both sides of our mouth so that one of the two scenarios will come to fruition and we will claim victory no matter what. Markets are dynamic, fluid and non-linear in nature.
One way of comparing our analysis is to that of a head coach of a football team and the staff that compose a game plan for their upcoming opponent. Many coaches even have 15 pre-scripted plays that they run at the beginning to see what the reaction of the opposing coach will be. As well, the game plan of each coach usually has provisos and possible adaptations given certain scenarios that can come up during the actual game.
The football coach must adapt to what’s given during the real game. It simply is not possible to stubbornly stick to one specific path when the facts in front of you change. We do the same in our analysis. There’s a likely path in the bigger picture. This is similar to it being likely that the superior team will come out victorious in any competition. We have our most likely scenario that we follow, but we also have an alternative to consider.
Being able to quickly adapt to changing landscapes is one of the hallmarks of Elliott Wave analysis, when correctly applied.
I would like to take this opportunity to remind you that we provide our perspective by ranking probabilistic market movements based upon the structure of the market price action. And, if we maintain a certain primary perspective as to how the market will move next, and the market breaks that pattern, it clearly tells us that we were wrong in our initial assessment. But here’s the most important part of the analysis: We also provide you with an alternative perspective at the same time we provide you with our primary expectation, and let you know when to adopt that alternative perspective before it happens.
There are many ways to analyze and track stocks and the market they form. Some are more consistent than others. For us, this method has proved the most reliable and keeps on us the right side of the trade much more often than not. Nothing is perfect in this world, but for those looking to open their eyes to a new universe of trading and investing, why not consider studying this further? It may just be one of the most illuminating projects you undertake.
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This article was written by
Analyst Levi at Elliott Wave Trader. In order to trade profitably, you need to be well equipped to recognize the greatest probability pattern for the upcoming trend in whatever market you choose to trade. Elliott Wave analysis, when utilized appropriately, will provide you with high probability set- ups of what the market CAN do, while excluding what the market will not do. Ever wonder why the market will surge up after bad news has been announced, or will plummet after good news is announced? Elliott Wave theory explains this anomaly with the understanding that the markets move based upon public sentiment, and not news. Any seemingly good news that is announced during a negative sentiment period seems to be “discounted,” and vice versa.
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in AMZN over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.