Why Amazon's 'Overbought' Signal Isn't a Red Flag

Shares of tech giant Amazon.com Inc (NASDAQ: AMZN) surged more than 10% last week, starting what looks like what could be a decisive run toward November's all-time high. The move hasn't come out of the blue. For months now, the stock has been carving out a steady series of higher lows, quietly building pressure beneath the surface even while the significant gains weren't coming.

As the rally has started to gather fresh pace, one of the stock's technical indicators is grabbing attention. Over the past week, Amazon's relative strength index (RSI) has jumped to 70, a level traditionally associated with overbought conditions. In many stocks, that would be enough to raise red flags and prompt caution. With Amazon, though, knowing the context suggests this is more likely a buy signal.

Why Overbought Doesn't Always Mean Overdone

The RSI is a momentum indicator designed to measure the speed and magnitude of recent price moves. Readings above 70 are typically described as overbought, suggesting a stock may be due for a pause or pullback. The opposite is also true, in that a reading of 30 or below indicates the stock is extremely overbought and due for a bounce. 

The thing is, when it comes to uptrends, a stock's RSI can remain elevated for extended periods as buyers consistently step in on minor dips. Rather than marking the start of a top, an RSI that is just starting to cross into overbought territory can often confirm that momentum has shifted decisively in favor of the bulls. Amazon's current setup looks far closer to the latter scenario than the former.

What makes it even better is that a single catalyst or headline hasn't driven this rally. It follows weeks of steady accumulation and ever-improving sentiment, both of which bode particularly well for the stock's short-term prospects. 

Earnings Timing Could Favor Amazon Bulls

Another reason the overbought signal could be viewed more positively than usual is its timing. Amazon's next earnings report is scheduled for release at the end of January. Historically, this has been a bad time to bet against the stock, and there's a sense the bears are aware of that right now. 

The company has a strong track record of performing well both into and out of earnings, and with the RSI suggesting the bulls are entirely in control, the risk-reward profile is looking increasingly attractive.

Also important to note is the fact that Amazon finished last year essentially flat, despite consistently delivering solid results. That means this rally is not coming after a period of excess optimism. Instead, it looks more like the market is finally ready to play catch-up with a stock that's rarely looked better. 

Bullish Analyst Sentiment Confirms Amazon’s Momentum Shift

Amazon's momentum is being reinforced by overwhelming analyst support, with multiple firms maintaining bullish stances and price targets north of $300. With the stock trading below $250, the path of least resistance remains higher.

This matters for how this latest RSI signal could be interpreted. Overbought readings tend to be more meaningful when fundamentals are deteriorating or when sentiment is euphoric. Neither is the case here. Instead, analysts remain super bullish, expectations are high for another earnings beat, and the broader narrative around Amazon's growth drivers remains very much intact.

Rather than signaling froth, the RSI at 70 suggests that the market is finally committing capital in size. In that context, it looks less like a reason to step aside and more like confirmation that a new phase of the rally may be underway.

How Investors Might Approach Amazon Here

All that being said, that doesn't necessarily mean the next phase of the rally will be linear. Short-term pauses or minor pullbacks are always possible, especially after sharp weekly gains as we've just seen.

But the broader takeaway is that having failed to break the stock's multi-month uptrend, the bears appear to have lost whatever footing they had. If the stock can consolidate, if not add to, its recent gains in the coming sessions, it will be tough to bet against it heading into earnings in two weeks.

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The article "Why Amazon’s ‘Overbought’ Signal Isn’t a Red Flag" first appeared on MarketBeat.