Price Patterns: A Case Study on Amazon’s Breakout
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Price Patterns: A Case Study on Amazon’s Breakout
Before we get into the nitty-gritty, let’s set the stage. Amazon, synonymous with innovation and global reach, has been a titan in the stock market. Just recently, we discussed Amazon alongside Meta and Alphabet as key stocks to watch in July. But the big question is, how can one accurately play the patterns these stocks exhibit? Here’s what you need to know about the three steps to every price pattern, using Amazon as our prime example.
IDENTIFYING THE SETUP
The first step in any price pattern is called the setup. Picture yourself scanning the chart of Amazon. Over the past twelve months, it’s been generally bullish, staying mostly above two upward sloping moving averages. However, from April to June, the stock stalled out around $190 per share—a key point we’ll revisit. This is the setup phase.
Notice that the price hovers around $190 multiple times—in April, May, and June. Such repetitive touchpoints, known as pivot points, help in establishing a resistance level. The setup phase, therefore, is when your eyes tell you there’s a pattern forming. For Amazon, repeatedly testing the $190 share price hinted at a potential ascending triangle pattern.
GETTING TO THE TRIGGER
This step is where many novice analysts falter. Impatience often leads them to bet immediately on a suspected pattern, risking false breakouts. The trigger, the second step, is the confirmation moment—the point at which the pattern proves its validity. In classic technical analysis literature, this is essential.
In Amazon’s case, the trigger happened when the price finally closed above the $190 resistance level after multiple touch attempts. This breakout was pivotal, turning the “potential ascending triangle” into a confirmed pattern. This step guards against making premature trades triggered by mere speculation.
WAITING FOR THE CONFIRMATION
Here’s where the rubber meets the road: confirmation. Many traders jump the gun after seeing the trigger, but experienced analysts understand the importance of waiting for follow-through.
Post-breakout, observed in Amazon’s price crossing $190, the final step is to look for continuous momentum. What we saw was reassuring—additional buyers came in after the breakout day, pushing the price upward to around $200 per share. This follow-through confirmed the breakout wasn’t a fluke but a solid upward momentum.
WHY FOLLOWING THE THREE STEPS MATTERS
Think of these three steps—setup, trigger, and confirmation—as a foolproof way to navigate stock trading, especially for those just dipping their toes into technical analysis. Practicing patience and waiting for all three steps can safeguard your capital from hasty decisions. Ignoring any part of this trifecta can lead to false assumptions and financial pitfalls.
So, the next time you analyze a chart, remember to identify the setup phase first. Don’t rush; wait for that trigger moment to validate your suspicion. And finally, look for the necessary confirmation that the movement is here to stay. These steps can transform your approach to technical analysis, turning mere speculation into informed trading.
Investing is not just about finding patterns—it’s about understanding them. Be well, stay safe, and happy trading!
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Originally posted 16th July 2024
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