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Amazon stock analysis for June: technicals point to higher prices

The breakout on the share price should target the $2,750 level

Amazon stock analysis

Amazon continues to lead the discretionary sector higher, hitting $2,500 for the first time in late May. The combination of robust sales from its AWS cloud unit and 29 per cent year over year growth in US sales continues to propel the stock price. Amazon trucks have replaced FedEx and UPS for its deliveries, allowing Amazon to become one of the world’s largest logistics operations ranging from air cargo to customer end-point delivery. 

The choppy nature of price action should continue to subside. After hitting all-time highs in March 2020, Amazon implied volatility, which is used by option traders to price option premiums, has declined to levels seen in January prior to the Covid-19 pandemic. 

Revenue beat, earnings miss

In late April, Amazon announced financial results that showed the company beat on the top line but missed on the bottom line. Amazon reported a Q1 net income of $2.5bn on revenue of $75.5bn and earnings per share of $5.01. Expectations were for the company to generate $73.61bn in revenue on earnings per share of $6.25. 

Shares to remain volatile

Implied volatility on Amazon shares has collapsed as the stock price broke out. Implied volatility, which gauges fear and greed, hit a high of 78 in March, a high of 64 in April and is currently hovering near 33 in May, which is approximately the same levels the stock experienced in January ahead of the spread of Covid-19. This means that the share price will likely experience average volatility going forward. 

Historically, Amazon’s shares rise during June. Over the past 10 years, the stock price has shown positive performance 70 per cent of the time for an average monthly gain of 1.4 per cent. Let’s analyse whether this may change this year.

Amazon stock technical analysis

The Amazon share price formed a classic cup-and-handle breakout pattern in May which lead to an all-time high and points to higher prices in June. Amazon shares experience a similar breakout pattern in April which led to a 10 per cent rally. Target resistance for Amazon is likely to be another 10 per cent higher near $2,750. Support on the shares is seen near the 10-week moving average at $2,203. 

Short-term momentum remains positive as the fast stochastic recently generated a crossover buy signal. The only caveat is that the fast stochastic is printing a reading of 93, well above the overbought trigger level of 80, which could foreshadow a correction. The weekly relative strength index (RSI) is also in overbought territory, as the index is printing a reading of 71, just above the overbought trigger level of 70. Medium-term momentum remains positive as the MACD (moving average convergence divergence) histogram is printing in positive territory with an upward sloping trajectory which points to higher prices.

AMZN stock analysis: the bottom line

Amazon will likely continue to outperform, as consumers around the globe benefit from its logistics prowess. Strong revenue growth during the pandemic shows the company is poised to make money in all market environments.

The technicals point to higher prices, as momentum remains positive. The breakout on the share price should target the $2,750 level. Investors should be concerned with overbought technical conditions and look to add to long positions on dips.

FURTHER READING: Stock market crash 2020: what is going to happen next?

FURTHER READING: Which investments are the best during a recession?

Image: Shutterstock

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