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Jim Cramer is often asked about Amazon and Netflix. Individual investors love the stocks, in part because they've generated whopping returns over 5 years, but worry if they buy at current levels, they could lose their shirts.
That's because both are growth stocks and trade at high multiples. Typically conventional metrics, such as profits, aren't reliable barometers for growth stocks; in turn it's difficult to determine whether shares will advance or not.
Although Netflix is now positive for 2014, Amazon is not, although sentiment may be changing. Given how difficult these stocks can be to hold, what should you do?
Jim Cramer always makes his ultimate investment decisions based on fundamentals, however, in difficult situations such as these, he turns to technical analysis for insights. The following technical analysis was provided by Tim Collins, one of Cramer's colleagues at RealMoney.com.
Looking at , Collins says there are key levels that every Amazon bull should be following closely.
He says that from early June until quite recently, Amazon was stuck in a channel between $320 and $340; however last week the stock rallied above the ceiling, a level that also generated resistance in April.
Because former levels of resistance become new levels of support, if buying endures, Collins believes that $340 can be seen as a new floor that should hold on a pullback. With the next level of resistance around $380, Collins thinks Amazon has more potential upside then downside.
And looking at longer term patterns, Collins thinks the formations support the bullish thesis. Collins says that after looking back at the Amazon rally in 2012 and 2013, the recent six month pullback has generated a so-called flag pattern that formed after a 23-month long rally. Because a flag pattern is what's known as a continuation pattern, technicians take it as a sign that as soon as the flag formation ends, the stock will resume its rally.
However, like every good trader, Collins bullish outlook could change, if a new pattern emerges. Looking at the weekly chart, if Amazon fails to rally higher from current levels, and instead starts to sink, the flag thesis will be denied. Instead a new pattern will emerge: one in which Amazon is making a lower high and lower low. That kind of pattern is very bearish. To Collins it would raise concerns that the Amazon bull was dying. And he says if the bull dies here, Amazon could drop $100, down to the mid-$200's.
Although that negative scenario is possible, Collins doesn't think it's the most probable, at least not as circumstances currently stand. Collins says there are enough positive patterns to remain bullish until proven otherwise.
Looking at the daily chart of , Collins says patterns appears to be making the head and shoulders pattern, a classic bearish formation. In this case the critical level is $430. Collins says if Netflix drops below $430, the pattern would be completed and he believes the resulting decline would drive the stock down to $390.
Conversely, Collins says if Netflix stays above $430, then the head and shoulders pattern won't form. In that case, he says look to see if Netflix can break above $460. If it can, the bearish pattern will dissolve, and if Netflix can rally past $475, then additional upside could be significant.
In this case, however, although the bullish scenario is possible, Collins doesn't think it's probable. He thinks the bearish patterns are more likely to dominate.
In part, that's because, he says, the Relative Strength Index or RSI has made a lower high while Netflix's stock has rallied; that's a bearish divergence. And he sees the same kind of development in the FORCE Index, which looks at volume along with the size of a stock's move to measure the power of the bulls or the bears. This also made a lower high, another bearish divergence.
All told, Collins feels that Netflix is best viewed as risky from a technical perspective, and although he wouldn't recommend shorting it, he does think you should be very careful if you own it.
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Jim Cramer often talks about how difficult it is to own high multiple stocks such as Amazon and Netflix. He calls them cult stocks because they're driven by emotion as much as anything else.
"I wish there were some valuation case to be made for either one. Unfortunately, there just isn't," Cramer said. "But in the wake of Collins analysis, the technicals suggest if you're looking to play a cult stock, Amazon appears to be a better bet than Netflix, at least for the moment."
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