Amazon.com, Inc (NASDAQ: NASDAQ:AMZN) was surging over 5% higher on Thursday with bullish momentum after closing the trading session more than 3% higher on Wednesday.
The soaring stock price of the e-commerce and streaming giant may be in reaction to a double bottom pattern that Amazon printed on the daily chart.
A double bottom pattern is a reversal indicator that shows a stock has dropped to a key support level, rebounded, back tested the level as support and is likely to rebound again. It is possible the stock may retest the level as support again, creating a triple bottom or even quadruple bottom pattern.
The formation is always identified after a security has dropped in price and is at the bottom of a downtrend, whereas a bearish double top pattern is always found in an uptrend. A spike in volume confirms the double bottom pattern was recognized and subsequent increasing volume may indicate the stock will reverse into an uptrend.
- Aggressive bullish traders may choose to take a position when the stock’s volume spikes after the second retest of the support level. Conservative bullish traders may wait to take a position when the stock’s share price has surpassed the level of the initial rebound (the high before the second bounce from the support level).
- Bearish traders may choose to open a short position if the stock rejects at the level of the first rebound or if the stock falls beneath the key support level at which it created the double bottom pattern.
The Amazon Chart: Amazon’s double bottom was printed on May 12 and Tuesday near the $2,040 level, and on Wednesday and Thursday, the algorithms reacted to the pattern. On the four-hour chart, Amazon has reversed course into an uptrend, which may give short-term bullish traders more confidence that a trend change on larger time frames may be on the way.
- For now, Amazon remains trading in a downtrend on the daily chart, with the most recent lower high printed on May 17 at $2,316 and the most recent lower low printed on Tuesday at the low-of-day.
- To reverse course into an uptrend on this timeframe, Amazon will either need to soar up to the $2,320 level or consolidate downward over the coming days to form a higher low.
- Higher prices are likely to come over the next few days because Amazon has developed bullish divergence that hasn’t yet corrected. Bullish divergence occurs when a stock makes a series of lower lows while the relative strength index makes a series of higher lows.
- If Amazon closes the trading day near its high-of-day price, the stock will print a bullish Marubozu candlestick, which could indicate higher prices will come again on Tuesday. If the stock closes the session with a long upper wick, it could indicate lower prices will come and either a higher low or a lower low will follow.
- Amazon has resistance above at $2,367.92 and $2,631.82 and support below at $2,176.79 and the psychologically important $2,000 mark.
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