2020 was shaping up to be a disaster for Disney shareholders. Not only did the COVID-19 selloff cause a 48% plunge in the stock price, but the indefinite closing of cinemas worldwide crippled Mickey Mouse’s business operations.
The company’s Disney+ streaming offering came to the rescue, but still could not prevent the company from posting its first annual loss in over four decades. Yet, in March 2021, Disney shares exceeded the $200 mark for the first time. In probably the worst twelve months in its history, the company’s valuation more than doubled.
Obviously, the market is not in the mood to care about such trivial things like business fundamentals. Even if we take Disney’s 2018 free cash flow figure of nearly $10B, the stock is still quite expensive at a 33.5 P/FCF ratio. So in order to see if $183 a share is a good buy level, we need a different tool.
The daily chart above puts Disney ‘s recovery from the COVID panic bottom in Elliott Wave perspective. It can easily be seen as a five-wave impulse with a missing fifth wave. So far, we have waves (1) through (4) in place. The five sub-waves of wave (3) are clearly visible, as well.
Disney ‘s Uptrend Appears to be Losing Momentum
Assuming a complete pattern is going to form, it makes sense to expect a new high in wave (5). Fifth waves exceed the end of the corresponding third wave in 99% of the cases. This means levels near $210 a share can soon be anticipated.
On the other hand, the theory says that a three-wave correction follows every impulse. So if the count above is correct, a bearish reversal can be expected once Disney makes a new high. This is the very same logic we followed in November 2019, when we predicted the 2020 crash itself.
Another reason to be wary of this rally is the RSI indicator, which shows a bearish divergence between waves 3 and 5 of (3). It looks like the bullish momentum is already fading. The anticipated correction can easily wipe 25% – 35% off Disney ‘s valuation. In our opinion, investors planning to buy above $200 a share are playing with fire.
Similar Elliott Wave setups occur in the Forex, crypto and commodity markets, as well. Our Elliott Wave Video Course can teach you how to uncover them yourself!