The End of Amazon’s Bull Run

When it comes to Amazon, Inc. [NASDAQ:AMZN], there are two types of people: the lovers and the haters. For the lovers, Amazon is their online shopping overlord…for the haters, it’s just another hyped-up and overpriced tech stock.

Based on the share price movements for Amazon over the past few weeks, those that hate the retailing giant are out in full force. Technical analysts are currently going bananas over the pattern forming in the Amazon charts, rooting for the US$960-per-share company to fall.

Since Monday last week, US$20 has been shaved off the share price, or 0.84%. That doesn’t look like any cause for concern.

However, it’s the technical footprint that this falling share price left in the charts that has technical analysts in the US in a tizz. The declining share price has had observers wondering whether a ‘head and shoulders’ pattern is forming.

A head and shoulders pattern on a chart describes the reversal of a current trend. Most technical analysts believe a head and shoulders pattern is the most reliable indicator that an uptrend is over. In other words, if a head and shoulders pattern forms for a company, it spells the end of a bull run. Worse still, it also suggests that said stock is getting ready to fall much further down.

The pattern can be easy to spot once you know what to look for. A head and shoulder pattern has three key features.

First, a long bull run reaches a peak, and then suddenly pulls back. Then, after the retreat, the share price stages a sharp rally, but ultimately falls again. Often the share price falls to the first point of retreat. The kicker for the head and shoulders pattern, though, is that the share price ekes out a third rally, but the stock runs out of puff when it reaches the first peak once again.

Once this happens, the share price takes a tumble, leaving the head and shoulders pattern in place.

Have a look at the chart below. I have marked out in black lines the head and shoulders pattern exciting Amazon detractors:

Amazon, Inc. daily/yearly chart

Amazon chart 23-08-17

Source: Yahoo Finance
[Click to enlarge]

Those cheering for Amazon to fall have been quick to point out that the company’s shares are now at a three-month low. Combined with the head and shoulders pattern, this is a clear signal to technical traders that the dream bullish rally for Amazon is over.

Interestingly, some clever observers have taken to Twitter saying that Amazon didn’t just make a head and shoulders pattern. Rather, its chart forms a ‘witches hat’. See for yourself…

Twitter: Amazon 'witches hat' 23-08-17

Source: MarketWatch
[Click to enlarge]

The chartist above suggests that, aside from Amazon’s share price forming a witch-like shape, if Amazon falls from its current price of US$960, the stock could tumble all the way down to US$825 a share.

I wouldn’t be surprised to see the Amazon share price pull back. It has had an incredible rally since the start of 2016, gaining 59%. The problem, in my view, is that the stock is very overpriced for now. Amazon shares currently have a price to earnings (P/E) ratio of 181. To put that in perspective, tech juggernaut Apple Inc. [NASDAQ:AAPL] has a P/E ratio of 18. And Wal-Mart Stores Inc. [NYSE:WMT], one of the biggest US retailers, has a similar P/E of 18.

Generally speaking, the higher the PE, the higher the returns investors can expect in the years to come.

Does this technical pattern mean Amazon shares have a much bigger fall coming? Possibly.

Whether you see a head and shoulders pattern or a witches hat, technical analysts are certainly excited that the stock is getting ready to drop.

Aussie oil stocks up

Closer to home, earnings season continues apace. Banks, mining and oil stocks did the heavy lifting for the S&P/ASX 200 yesterday, which rose 24 points.

Oil Search Ltd [ASX:OSH] finished 3.29% higher after announcing it would quadruple its first-half dividend payout. Higher sales revenues and recent cost-cutting have seen a fivefold increase in first-half profits.

Catching investors off-guard, however, was the double whammy of news from BHP Billiton Ltd [ASX:BHP]. The company announced a $7.6 billion underlying profit for the 2017 financial year. This is an incredible 180-degree turnaround from the $6.39 billion loss the company record last year. It was largely due to the $7.7 billion impairment write-downs for the 2016 financial year.

More importantly, however, BHP announced its exit from the US shale oil sector. Back in 2011, the then CEO Marius Kloppers started buying into the shale industry, slowly spending up to $50 billion acquiring assets.

Yet, six years later, BHP has a problem on its hands. The company jumped into the shale industry at its peak, and the move was very unpopular with Aussie shareholders.

Last year, the company finally came out and admitted in a note that the foray into the shale business had not been a good investment.

However, it was the note inside the company’s 2017 financials yesterday which confirmed the mining giant is getting out of shale altogether, telling investors:

We have determined that our onshore US assets are non-core and we are actively pursing options to exit these assets for value. In the meantime, we will complete well trials, acreage swaps and access mid-stream solutions to increase the value, profitability and marketability of our acreage.

In other words, BHP is admitting that the shale business isn’t for them.

The price BHP gets for their shale assets will be worth watching. The West Texas Intermediate (WTI) price is currently hovering around US$48 a barrel. BHP bought into the shale sector when the WTI was around US$120 a barrel. In other words, the shale side of the business is worth roughly a third of what BHP paid for it.

The timing to pull out of the US shale industry is interesting to say the least.

Yesterday, I explained that the US shale industry is running on fumes, and that it barely makes any money. In fact, lenient US bankruptcy laws are perhaps the only thing keeping the sector afloat.

My colleague Greg Canavan believes the US shale industry is a nothing more than a mirage. In a new report, Greg says that there is a massive opportunity to invest in oil stocks right now. In fact, as we head into 2018, Greg says that oil is likely to enter a bull market.

He’s picked three energy stocks on the ASX that could potentially hit 10-bagger status as this bull market unfolds. Details here.

Kind regards,

Shae Russell,
Editor, Markets & Money

Shae Russell started out in financial markets more than a decade ago. Working with a derivative brokering firm, she helped clients understand derivative markets, as well as teaching them the basics of technical analysis. Since joining Port Phillip Publishing eight years ago, Shae has worked across a number of publications. She holds the record for the highest-returning stock recommendation, in which a microcap stock returned over 1,200% in six months. Ask her about it, and she won’t stop yapping on. For the past two years, Shae has worked alongside Jim Rickards as his Australian analyst, translating global macro trends for Aussie investors, and how they can take advantage of these trends. Drawing on her extensive experience, Shae is the lead editor of Markets & Money. Each day, Shae looks at broad macro trends developing around the world, combining them with her distaste for central banks and irrational love of all things bullion.

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