Thursday, April 26, 2007

Amazon: Should You Buy When the Stock is High?

Responding to my recent Stockfest post, a reader has asked about Amazon (AMZN).

One of the lines of research I'm pursuing is a combination of the Relative Dollar Volume flow data for individual stocks and the historical trading patterns associated with those stocks. The idea is that you would buy (or sell) when you have a historical edge *and* when dollar volume flows support that edge.

Money flow has absolutely exploded in AMZN during its recent rise. Even prior to the strength of the last two sessions, flows were positive during 11 out of 13 sessions. The current strength represents multiyear highs and a break out of a price range going back to the beginning of 2005.

Since 2004, however, (N = 814 trading days) strength in AMZN has not led to further strength. When AMZN has been up more than 8% over a 20-day period (N = 182), the next 20 days in AMZN have averaged a loss of -4.02% (60 up, 122 down). By contrast, across all other occasions (N = 632), AMZN has averaged a 20-day gain of 1.41% (339 up, 293 down).

This time could indeed be different, as AMZN may have begun a meaningful trending move. My preference, however, is to wait to see how volume and money flows behave on pullbacks before chasing highs against recent historical odds.

2 comments:

CrossProfit said...

We have been to this party before. Let's see where AMZN is in 6 to 12 months from now, using same store sales data.

See http://www.crossprofit.com/article.asp?id=2 for more details.

It is unwise to fight the trend though. When money stream fizzles out, then AMZN is a possible short.

Disclosure: This is the opinion of a CrossProfit (IL) analyst and may not be the consensus at CrossProfit.com.
http://www.crossprofit.com

Brett Steenbarger, Ph.D. said...

Hi CrossProfit,

Thanks for the perspective and links!

Brett