Amazon.com, Inc AMZN was trading slightly lower on Monday after a bearish day on Friday dropped the stock down 4.77%.
The sharp market downturn came after better-than-expected U.S. unemployment data was released on Friday, which traders and investors believe may have paved the way for the Federal Reserve to continue hiking interest rates at a rapid pace.
Amazon’s lower prices on Monday weren’t made on high momentum, however, and the stock was failing to break down below Friday’s low-of-day, which has settled 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 charts 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 of 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: Amazon’s inside bar pattern leans bearish because Amazon was trading lower before forming the pattern and because Monday’s inside bar was printing near the lower range of Friday’s mother bar. Traders and investors can watch for Amazon to break up or down from Friday’s mother bar on higher-than-average volume later Monday or on Tuesday to indicate future direction.
- Amazon has been trading in a fairly consistent downtrend since Aug. 16, although recently the stock is holding in a short uptrend. If Amazon breaks down bearishly from the inside bar pattern, bullish traders will want to see the stock print a bullish reversal candlestick, such as a doji or hammer candlestick, above $112.45, otherwise, the uptrend will be negated, and the longer-term downtrend will likely resume.
- Amazon has a few gaps above on its chart, with the closest gap between the $118.17 and $119.50 range. Gaps on charts fill about 90% of the time, which makes it likely Amazon will rise up to fill the empty trading range in the future.
- Bears who aren’t already in a position may choose to wait and see if Amazon prints a bearish reversal candlestick near the upper range of the gap on the next bounce.
- Amazon has resistance above at $117.16 and $122.24 and support below at $109.30 and $99.88.
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