SMARTMONEY.COM: The Technicians Turn On Amazon
By Tiernan Ray
Smartmoney.com
NEW YORK (Dow Jones)--"You know the end of something is near when the professionals start to
get cautious, and the amateurs get excited," says John Murphy, one of the deans of that dark Wall
Street discipline known as technical analysis.
Murphy has been turning away frantic emails from rabid Internet investors ever since Amazon.com
Inc. (AMZN) soared from around 25 in September to 200 in January. "We just don't want to be a part
of this anymore."
Murphy, along with other professional chartists, sees in the tea leaves of Amazon's recent drop a sure
sign of what he calls "S.O.S.," or "sell on strength." Amazon peaked at an intraday high of 199 1/8 on
Jan. 8, and by Thursday had lost 50% of its value, closing at 106. Murphy, head of JJM Technical
Advisors in Ordell, N.J., says he and the rest of the technical crowd are looking for a slight bounce in
Amazon and an opportunity to unload some stock.
Sure as shootin', Amazon was back up around 113 by midday Friday from its Thursday close of 106.
OK, but what about Brazil? What about Barton Biggs? When a stock like Amazon "climbs the wall of
worry," as a chartist would say, and then plunges almost as sharply, it must have something to do with
Russia, right? Nope. Murphy and colleagues say the drop in Amazon and Yahoo! Inc. (YHOO) was
itself rather predictable, presaged by all kinds of technical indicators.
Say what you will about technical analysis, but when a stock's price has no connection to its underlying
fundamentals, you may as well look at technical indicators for a sign of what's to come. Specifically,
Murphy says the current drop was overdue: Since Amazon's September low of 24 1/2, its relative
strength indicator, or RSI - a technical measure - has gone from below 30, a sure buying sign, to above
90. "That is an extraordinary number," says Murphy, and one not touched since Amazon's last climb,
back in July of last year, when the RSI went berserk.
Is there a colorful name for the kind of Amazon chart you're seeing? Murphy says not to worry about
typology, though you can call this one a "blowoff," if you want to get technical. John Roque, vice
president with Arnhold & S.
Bleichroeder in New York, says the Amazon curve was parabolic on the upswing, since the climb was
nearly vertical. "On the downswing, I think you'd just have to call it scary," he says.
A bit more flesh was put on those bones by Tracy Herrick, chief investment strategist at Jeffries &
Co., who combines chart watching with a strong monetarist outlook. Herrick says Amazon, Yahoo and
all the penny Internet stocks have been so good of late because the Fed has been easing the money
supply since September as part of its attempt to bail out all of the banks that had to bail out troubled
hedge fund Long-Term Capital.
"The growth stocks like Amazon always do well in an environment with an expanding money supply,"
says Herrick. "People take out second mortgages; they start checking the stock listings; banks ease up
on margin restrictions."
So where do we go from here? Roque and Murphy are not surprised by Friday's bounce in Amazon,
given that the stock touched its 50-day moving average of 92 on Thursday, a sign generally that a stock
will recover some ground. They say to sell if you can, but if you're thinking of buying back in, watch for
new lows. "If we break that 92 line again, we could see an even bigger drop down to 65 or 70," says
Roque. It could fall even as far down as September's lows, adds Murphy.
What will decide the shape of the current bounce? Murphy is looking at the average volume of Internet
stocks, which he says has been noticeably lower in the past week. Actually, it's been below 20 million
shares traded for Amazon for days now. Murphy says he would look for volume above that level before
saying there's any strength to Friday's bounce. Both technicians say that Yahoo, which peaked at 445
on Jan. 11, has yet to drop as far as Amazon and may still drop a bit further. Yahoo was up 5% from
Thursday's close at 278 by mid day, Friday.
Herrick, however, thinks the money supply again tells a simpler story. M2, a measure of liquidity that
includes checking accounts and money market funds, has cooled off recently, he says. Plus, when
Greenspan told Congress the other day that the current market may have trouble 'sustaining its recent
performance," that was "Greenspeak' for, "I'll be contracting the money supply now, thank you.' He
says that Long-Term Capital is well on its way from super hedge fund to being "just another
nickel-and-dime mutual fund" and that Greenspan is about to take some money off the table.
And maybe, says Herrick, that means you should, too. |
