If you follow the logic of cause and effect, which by the way coincides with the logic of fundamental analysis, you would expect the price of a stock to rise in case of good news for the company and to decline, when bad news are released. For the human mind, this chain of thought makes perfect sense. Then how would you explain something like this: “On July 22nd Bill Ackman, the billionaire boss of Pershing Square, delivered a three-hour presentation that he said would kill off Herbalife, a seller of nutritional shakes and foods, by showing it to be a criminal enterprise that preys on the poor. But as he spoke, Herbalife shares ticked steadily higher.” – The Economist –
In this case, it is not just a single bad sales report or something like that. It is a deliberate attack, aiming to destroy Herbalife’s reputation. But the Market ignored it and Herbalife’s stock rose, contrary to all logical expectations. “The Economist” applied the following chart to illustrate this “Herbalife paradox”.
The chart shows the last four pieces of news, concerning Herbalife’s share price. The first three of them are said to have caused declines, while the fourth one is said to be a complete surprise. For the untrained eye there is nothing more to see on this chart. It is just an illustration of the events. On the other hand, the Elliottician’s eye sees things a little different. Below you will see the same chart, but this time with an Elliott Wave labeling. As visible, the first two pieces of bad news happen to fit perfectly as waves A and C of wave 2 circled. Despite of being two heavy punches for Herbalife, those waves A and C were just parts of an A-B-C zig-zag correction. According to the Elliott Wave Principle, after every correction, the trend should resume. That is exactly what happened. Against all odds, the stock managed to recover from below 30 to above 80. Note that this rise was in five waves. Then came the third hit “Sen. Edward Markey calls for probe”, right after the end of wave 5 of (1), when there should be a corrective decline, with or without bad news, because after every impulse, a correction should follow. Now we have come to Ackman’s “death blow”, which instead of killing Herbalife, appears to have resurrected it. And while everyone else is wondering “why”, Elliott Wave analysts are not surprised at all, because after the 5-3 cycle, the trend is expected to resume in the direction of the previous five-wave sequence, regardless of any news and events. In this case – to the upside, regardless of Ackman’s attack.