Honeywell is a multinational conglomerate specializing in industrial software in the aerospace, home and building, performance materials, safety and productivity solutions technologies segments. The company has been around for over a century. It is a component of the S&P 500 index and just rejoined the DJIA earlier this year.
HON has a market cap of almost $150 billion, over half of which it has gained in the nine months since March. The recovery from the coronavirus crash saw the stock price rise from $101 to nearly $214 a share. Honeywell is now hovering at new all-time highs, which surely tempts many to join the uptrend now. The chart below explains why we think this would be a bad idea.
The chart above allows us to put Honeywell ‘s entire progress since October 2002 in Elliott Wave context. The impressive uptrend which took the stock price from below $18 to over $213 in eighteen years looks like a textbook impulse pattern. Its five waves are labeled (1)-(2)-(3)-(4)-(5).
Honeywell Is a Great Business, but a Bad Investment at This Price
Wave (2) unfolded during the Financial crisis of 2007-2009, while wave (4) corresponds to the COVID-19 crash. Between these two is wave (3), whose impulsive structure is marked 1-2-3-4-5. The sub-waves of wave 3 of (3) is also visible.
If this count is correct, the sharp surge Honeywell investors have been enjoying over the past nine months must be wave (5). According to the theory, a three-wave correction follows every impulse. This means that once wave (5) ends, we can expect a major retracement to occur.
The negative phase of the wave cycle usually erases the entire fifth wave. In Honeywell’s case, this translates into a decline back to roughly $120-$100 a share. The RSI indicator supports this pessimistic outlook with a bearish divergence between waves (3) and (5). Besides, HON can hardly be expected to grow at a 30% clip to justify its 2020 P/E of 30. In out opinion, there are plenty of technical and fundamental reasons to avoid this otherwise great business.
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!