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AAP Stock Setting the Stage for a “Black Swan”?

The second half of 2017 was the worst time in many years for retail stocks in general. Everything from apparel, to sporting goods and grocery chains was under heavy selling pressure. The market didn’t spare auto parts retailers, as well. One of the victims was Advance Auto Parts – AAP stock.

The stock crashed from an all-time high of over $201 in 2015 to under $80 in 2017. People were saying Amazon was going to kill yet another industry. But instead of listening to the bears’ roar, we decided to take a look at AAP’s weekly logarithmic chart for more clues. Here is what we found.

advance auto parts elliott wave analysis

In August 2017, we included this chart in an article, saying that it “provides plenty of reasons for optimism.” The selloff from $201 appeared to be a simple A-B-C zigzag in wave IV within a larger five-wave impulse, whose wave V up was yet to come.

Also, the RSI indicator revealed the share price has reached oversold territory just when it was touching the lower line of the trend channel drawn through waves I and III. So instead of joining the short-sellers, we thought a significant recovery was just around the corner.

AAP stock impulse pattern recovery

Wave IV ended at $78.81 in November 2017. By mid-November 2018, AAP stock was trading above $186 per share up over 135% in just twelve months. The problem is that trends do not move in a straight line. The above-shown rally took the shape of a five-wave impulse. According to the Elliott Wave theory, a three-wave correction follows every impulse.

AAP Stock Bulls Haven’t Won the Battle Yet

Given that the price has not been able to exceed the top of wave III on the weekly chart, chances are this impulse is wave (1) of V and the current weakness is part of wave (2) of V. Under this scenario, once wave (2) ends somewhere between the 50% and 61.8% Fibonacci levels, the uptrend can be expected to resume in wave (3) towards a new all-time high.

On the other hand, a possibility exists that the recovery from $79 to $186 is not just a part of wave V, but all of it. In that case, wave V would be “truncated“. Both the primary bullish and the alternative bearish scenarios are shown on the next chart.

AAP stock weekly chart Elliott Wave forecast

Truncated fifth waves are extremely rare, which is the reason we call them the Black Swan of Elliott Wave patterns. This also explains why our primary count is bullish. Going with the higher probability, it makes a lot more sense to expect a normal fifth wave rather than a truncation.

However, if AAP stock bears manage to breach the support line drawn through waves II and IV, the odds in favor of the alternative bearish count would increase dramatically.

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