PPR - Amazon.com (AMZN) Pocket Pivot and Flag Breakout has a Strong Technical Foundation

Published : October 16 2010 at 14:18 ET

Amazon.com put in quite a showing on Friday as it blasted out of a short flag formation, or what some might like to call a "high handle" to all-time price highs. "High handles" used to be seen as a flawed characteristic of cup-with-handle formations, but more recently O'Neil has deemed "cup-with-high-handle" to be a valid pattern. We prefer to see this as a flag type of formation, with Friday's move being a strong pocket pivot move that adds weight to the breakout on Friday. The stock also closed well within range of the 161.78 high in the flag pattern, as we see on the daily chart below. Notice also that AMZN did put in a breakout from a cup-with-handle where the handle was in the lower half of the cup formation, which is generally seen as flawed. However, we probably should have picked this up on that breakout since it was also a pocket pivot buy point coming up the right side of any potential base and hence allows us to ignore perceived "flaws" in bases.

Shifting to the weekly chart, we see that the handle is just barely in the lower half, and when taken in context with what we see as two major, positive features on the chart, does not need to be an issue when viewed solely as a pocket pivot buy point. First, note that the recent cup-with-handle base undercut the lows of a previous cup-with-handle base to cause a "washout" type of shakeout that essentially "clears the decks" for the stock to advance further. This is very constructive. Also note the huge upside volume spike in the weekly chart right at the lows of the cup - this is huge volume supporting action. When viewed in this context, and focusing on the fact that the September 1st breakout from the cup-with-low-handle was a pocket pivot point, you could have simply ignored low-handle, low-volume breakout that week as we have annotated on the chart. This to us is the underlying beauty of pocket pivot points - they allow you to ignore perceived but insignificant "flaws" in bases or base breakouts since we know that statistically the pocket pivot is more valid when properly implemented. AMZN is likely early in a potential price move, provided it simply holds the breakout of Friday, which provides a nice near stop-out point if it does fail. We like the risk/reward potential here, as well as what we see as a strong technical foundation for further upside price movement.

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