Three years ago, in January 2016, Etsy stock fell to as low as $6.04 a share. Yesterday, it closed at $54.59 a share.
If you have been among the lucky few, who happened to pick the bottom and held until now, your annual compounded rate of return would be over 108% per year or 803% in total. But don’t worry, if you didn’t – we missed that train, as well.
The thing is that according to fundamental valuation ratios like P/E, P/FCF or P/B, Etsy stock has been grossly overpriced the whole time. Yet, it simply kept on rising for three years.
The company’s profits and cash flows are too small to justify its $6.6B market cap, which means pure optimism has been the rally’s main fuel. So, in order to find out if ETSY still holds promise as an investment, we cannot rely on fundamental analysis.
Etsy Stock – the Elliott Wave View
In Elliott Wave analysis, on the other hand, market psychology plays a central role. It forms repetitive price patterns, which help us identify our place in the market cycle.
The daily chart above reveals Etsy stock’s entire uptrend from the bottom at $6.04 three years ago. It looks like a five-wave impulse, labeled (1)-(2)-(3)-(4)-(5), where wave (3) is extended. The market has also obeyed the guideline of alternation, since wave (2) is a zigzag, while wave (4) is an expanding flat correction.
The rally from the bottom of wave (4) to the latest all-time high of $58.30 has been limited to just three waves. This makes us think wave (5) is still in progress as an ending diagonal, whose wave 3 is currently developing.
If this count is correct, we can expect a couple of new highs in wave (5), but nothing as spectacular as the past couple of years. A three-wave correction follows every impulse. Once wave (5) is over, a 50% selloff would be a real danger.
In addition, there is a bearish MACD divergence between waves (3) and (5), which is another evidence of the bulls’ fading strength. The easy money has already been made in Etsy stock. Caution is advised.
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