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Barratt Stock Decline Not a Buy-the-Dip Opportunity

Barratt Developments PLC is the largest house-builder in Great Britain. Founded in 1958, the company acquires land and plans, designs, constructs, develops and sells homes in the United Kingdom. Similarly to many home-building companies, Barratt had a tough time during the housing crisis. The stock, which trades under the ticker symbol BDEV on the London Stock Exchange, got totally destroyed between February 2007 and July 2008, losing over 97% of its market cap following a crash from 859 GBp (penny sterling or pence) to as low as 22.8 GBp.

Fortunately, Barratt survived. Being conservatively financed definitely helped and as of this writing the stock is trading at 521 pence after a decline from 705 in October, 2017. In order to find out if this pullback represents a buying opportunity or the beginning of a bigger correction, we will take a look at the weekly chart of Barratt stock through the prism of the Elliott Wave Principle. The shape of the recovery we saw in the last decade does not look very promising for the next few years.
barratt stock elliott wave analysis
The bull market from 22.8 to 705 took over nine years and developed as a textbook five-wave impulse, labeled (1)-(2)-(3)-(4)-(5). On the bright side, this pattern means Barratt stock is likely going to reach a new all-time high once the uptrend resumes. The problem is that according to the theory, every impulse is followed by a three-wave retracement, which usually erases all the gains achieved by the fifth wave of the pattern.

In addition, the recent weakness from 705 GBp also looks like a five-wave sequence, confirming the bearish outlook. If this count is correct, a large degree simple (a)-(b)-(c) zigzag correction is in progress. Wave (b) might be able to lift Barratt stock to the 600 pence mark, but as long as the top of wave (5) holds, another selloff in wave (c) should be expected. The support of wave (4) near 330 GBp looks like a reasonable bearish target.

We cannot tell if this chart means the entire housing market in the UK is entering the negative phase of the business cycle again. It only suggests buying the dip in Barratt stock is not the best idea one can come up with right now.

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