Amazon Sets Up Trades For Bulls, Bears: Here's What To Watch Next Week

Amazon.com, Inc. AMZN was trading about 1.8% lower in consolidation on Thursday afternoon after rallying 3.8% intraday on Wednesday.

Thursday’s price action was taking place within Wednesday’s trading range which has set the stock into an inside bar pattern on the daily chart. An inside bar pattern indicates a period of consolidation and is usually followed by a continuation move in the direction of the current trend.

An inside bar pattern has more validity on larger time frames (four-hour chart or larger). The pattern has a minimum of two candlesticks and consists of a mother bar (the first candlestick in the pattern) followed by one or more subsequent candles. The subsequent candle(s) must be completely inside the range of the mother bar and each is called an "inside bar."

A double, or triple inside bar can be more powerful than a single inside bar. After the break of an inside bar pattern, traders want to watch for high volume for confirmation the pattern was recognized.

• Bullish traders will want to search for inside bar patterns on stocks that are in an uptrend. Some traders may take a position during the inside bar prior to the break while other aggressive traders will take a position after the break of the pattern.
• For bearish traders, finding an inside bar pattern on a stock that's in a downtrend will be key. Like bullish traders, bears have two options where to take a position to play the break of the pattern. For bearish traders, the pattern is invalidated if the stock rises above the highest range of the mother candle.

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The Amazon Chart: On Wednesday, Amazon bounced off a key psychological support zone at the $3,000 mark. The stock has been holding above the level since March 16 but has struggled to maintain bullish momentum on any rise due to a death cross that developed on the daily chart at the end of January.

• The inside bar leans bullish in this case because although Amazon isn’t showing any clear direction, the inside bar was forming near the top of the mother bar. When Amazon breaks up or down from Wednesday’s mother bar, which could happen on Monday, both bearish and bullish traders will have a solid entry point for at least a short-term trade depending on which direction the stock chooses.
• There is also a chance that Amazon develops a double inside bar on Monday, which could force a break from the pattern on Tuesday.
• On Thursday, Amazon was trading down on lower-than-average volume, which indicates consolidation as opposed to fear-induced selling. By midafternoon, only about 1.5 million Amazon shares had exchanged hands, compared to the 10-day average of 2.87 million.
• If Amazon is able to break up from the inside bar, the stock will regain support at the eight-day exponential moving average (EMA), which provides Amazon with the necessary power to also regain the 21-day EMA. If that happens, the eight-day EMA will eventually cross above the 21-day, which would give bulls more confidence going forward.
• Amazon has resistance above at $3,131.06 and $3,230.98 and support below at $3,000 and $2,881.

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