Berkshire’s Double Divergence Spells Trouble

berkshire elliott wave analysis monthly chart

Berkshire Hathaway’s shareholders are not like the owners of other public companies. By following Warren Buffett’s long-term approach, most of them stay with the company in good times and bad, regardless of what the market is doing with the price of the stock. Nevertheless, it pays to be prepared.

The last time we wrote about Berkshire was on November 25th, 2016. Almost nine months ago, while the stock was trading slightly below $160 a share, Elliott Wave analysis suggested the bulls should be able to reach $170, only to complete the five-wave impulse pattern, which has been in progress since the low in 2009. According to the theory, every impulse is followed by a three-wave correction in the opposite direction.

BRK.B is already approaching the $180 mark, so obviously we underestimated the strength of the uptrend. But does this mean the overall outlook has changed and we should no longer expect a decline? The updated chart below might help us find out.

berkshire monthly elliott wave chart

The monthly chart of Berkshire stock shows that the entire advance since March 2009 still looks like a textbook impulse. Furthermore, the relative strength index shows the typical bearish divergence between waves (5) and (3), indicating the bulls are slowly but surely running out of power.

Usually, the negative phase of the cycle drags the price back to the support area of the fourth wave. Here, this means that once wave (5) ends, BRK.B stock should plunge to the zone between $130 and $120 a share. What is left of wave (5) then?

berkshire elliott wave analysis monthly chart

The weekly chart above allows us to take a look at the wave structure of wave (5). As you can see, it too looks like a complete five-wave pattern. The sub-waves of wave 3 of (5) are also clearly visible. And, just like on the previous chart, the RSI indicator shows a bearish divergence between the last two high in wave 5 and 3 of (5).

Even the best of companies, one of which Berkshire Hathaway undoubtedly is, are not immuned to market declines, as the 2007-2009 period clearly demonstrated. Long-term shareholder should probably stay true to they philosophy and hold BRK.B no matter what, but for those, who are yet to join Mr. Buffett’s boat, $180 might turn out to be a very inappropriate level to buy in.

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