It has been a rough week for Advance Auto Parts shareholders. The stock closed at $109.32 on Monday, only to crash to as low as $82.21 on Tuesday for its biggest one-day drop ever, after the company announced weak results and provided a grim sales outlook. What makes things even worse is the fact that AAP‘s decline actually began back in November, 2015, when shares hit an all-time high of $201.24. In other words, this auto parts retailer lost over 59% of its market capitalization in less than two years.
But instead of sinking into despair and letting the crowd’s pessimism take over, let’s take a look at Advance Auto Parts’ weekly price chart and see where does the current selloff fit into the bigger Elliott Wave picture. After all, if the stock reversed to the south in late-2015, chances are it will not fall forever, as well, right?
AAP’s weekly logarithmic chart allows us to see the stock’s entire development since the company went public in 2001. 16 years later, it might feel as if the sky is falling, but fortunately, the Elliott Wave principle puts things into the perspective. As visible, Advance Auto Parts’ scary crash fits perfectly in the position of wave IV within a larger five-wave impulse pattern, which is still in progress. This stock has even obeyed the rule of alternative, since wave II was a textbook regular flat correction, while wave IV looks like a sharp zig-zag.
Despite all the gloom and doom surrounding nearly every single traditional retailer right now, this chart provides plenty of reasons for optimism. If this count is correct, wave IV has already touched the lower line of the trend channel, meaning wave V to the upside could start any minute now. In addition, the relative strength index shows the price has already entered oversold territory. Sir John Templeton once said that investors should “buy at the point of maximum pessimism.” Judging from the chart and the media headlines, it can hardly get more pessimistic than that. On the contrary, according to the Wave principle, wave V should take AAP stock above and beyond the top of wave III. We would not be surprised if it hits $240 a share in several years’ time.