How Technical Analysis helps when Fundamental Analysis cannot. A look at Amazon's earnings miss.

This afternoon after the market closed Amazon reported earnings that were well below expectations. Guidance also was lowered with a potential negative earnings in the 4th quarter as part of that theme. As a result no doubt there will be countless analysts coming out tomorrow and this week to lower Amazon's price target and/or their recommendations. Most of these analysts had price targets well above today's pre-announcement price of $227.15 and almost all had buy ratings (most of the others that did not, had hold ratings). I didn't come across any "sells". I mean who saw this coming?!?!?! Amazon had been one of the cream of the crop stocks over the past few years with its "cloud computing" stronghold (forget its 70+ forward P/E and 27% average annual earnings growth expectations. Right now Amazon's price is below $200 @ $199.01 as of 6pm central time. Can you chalk this one up as anything besides a massive fail by wall street analysts??? This seems to be a theme that continues to play itself out year after year when dealing with fundamental analysts. I would be very interested in studying the amount of luck (Beta) that the analysts benefit from versus the analysts that go against the market's beta and go out on a limb to actually predict something.

Every earnings season this is the typical charade. Analysts have price targets and if the company reaches that price target, the analysts increase their target price; if the company's price becomes too far below that target, they lower the price target (almost always after a major setback in price when it is too late for you). Essentially the analysts are backing into the price that the market sets by adjusting multiples, etc in the models to get to the current price, with a typical "buy" premium. They basically let the market tell them how to plug their models so that they can give never-ending buy/hold signals to their customers.

To me the best way to describe it is the infamous chicken and egg scenario. What/who is really predicting the price? Are the analysts actually predicting the stock's price or are they more or less just following the stock's price? Time and time again it seems they are just followers, like the rest of us. They assume the market is always right and efficient. That is the main problem with fundamental analysis. That is why you rarely see a price target significantly lower (or higher) than current prices (usually within a 1-2 standard deviation range), yet time and time again this strategy is wrong, often during major inflection points (like tonight with Amazon).

However, technical analysis can be used to help identify such points in time when analysts are likely too bullish and should scale back their estimates. The amazon chart below shows a very nice ending diagonal triangle. This is a technical pattern that occurs at the end of bull trends. It shows weaker and weaker momentum as price struggles to make higher highs. This pattern showed overlap in all the down moves into previous major price high territory. Where I have labeled 2 and 4 both encroached (greatly) on the 1 and 3 price highs. This shows major overlap and lack of conviction in the uptrend. There are other structural points with an ending diagonal, such as the 3 wave moves I have labeled A and B that help to identify this structure, as well.

Below the price chart are two measures of momentum, the relative strength and the MACD. The RSI (relative strength) shows the difference between changes in today's price versus a set period in the past. This helps identify the slowing of momentum, or the second derivative of price. The MACD is the Moving Average convergence/divergence and show the difference between trailing moving averages of the price. This helps show the difference above and below historical average prices. It too shows relative strength signs. Both of these indicators topped out on the way to the Sept $244 top. Notice that the $246 top coincided with both an RSI and MACD that peaked lower than where they were during the $244 top. This was a major warning sign, especially when price fell back below $235.

Another piece to the puzzle was the volume. Volume tells you a ton! For instance on most of the up moves, volume would decline from the initial thrust to the top such as the lower volume in the first half of September versus the higher volume at the end of August. Volume also helped to show the bottoms, with it usually weaker near the bottoms with a pickup when buying started.

Finally, we can use volume to help us find support areas. Notice on the left the "Volume by Price". This helps show that in the $190-$200 area, there has been a lot of volume. This is where the majority of people bought (and sold). This also is likely where a lot of people will "breakeven". I expect it to show support during this pullback on earnings. It may even provide another buying opportunity for the rebound that will likely occur to backtest the 2 to 4 trendline in the $215-$220 range. Notice too that there was relatively little volume at the peaks in price and above $200. To me this shows more interest in AMZN at the $200 price than at the $240 price.

Amazon is a great example of why I trust technical analysis more than fundamental analysis. Fundamental analysis helps provide a rear view mirror as to why price did such things, but technical analysis can help get you in front of that trend and help raise red flags in price action. After all, at the end of the day, the price action is what makes you money, not the company's fundamentals or some analysts's backed into expectations.