Fortinet Inc. provides cybersecurity solutions to large and small businesses and enterprises. The company went public on the NASDAQ exchange in late-2009. Great timing, as it allowed it to enjoy the phenomenal post-crisis bull market. In fact, by July 2020, FTNT stock was up 794% since its IPO, easily beating the S&P 500’s return over the same time period.
And that not such a big surprise. The company is profitable, growing and debt-free. But perhaps the stock was starting to look a little bubbly this summer. Yesterday, it closed slightly above $124 a share, down 18% from its $151.95 all-time high. Is this is buying opportunity or the beginning of a larger selloff? The Elliott Wave chart below tilts the odds in favor of the latter.
Fortinet ‘s weekly chart above reveals the stock’s entire progress since its 2009 IPO. It can easily be seen as a five-wave impulse pattern, labeled (1)-(2)-(3)-(4)-(5). The five sub-waves of wave (3) are also visible.
Fortinet – A Good Company is Not Always a Good Investment
This pattern can serve as a good example of the guideline of alternation. Wave (2) was a time-consuming sideways retracement, while wave (4) was a sharp selloff. The same way, wave 2 of (3) was deep and much faster than the triangle correction in wave 4 of (3).
If this count is correct, the July 2020 high at $151.95 was likely the end of wave (5). According to the theory, a correction of the same degree, but in the opposite direction follows every impulse. Corrections usually erase all of the preceding impulse’s fifth wave.
In Fortinet ‘s case, this means the stock can slide down to the support of wave (4) near ~$75 a share. From the current level of $124, this translates into a 40% drop. In addition, FTNT trades at an estimated 2021 P/E ratio of 52. In our opinion, even though there is nothing wrong with the company, its high valuation and the above-shown Elliott Wave structure make the stock a risky bet.
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!