Just as any other stock, PepsiCo took a hard hit during the 2007-2009 recession. But the company managed to survive and the stock began steadily recovering. Between March 2009 and now, the price of PepsiCo shares has more than doubled. From 45.40 seven years ago to 105.72 last month, the bad days seem to be long forgotten. There seems to be no reason to worry as the stock is hovering near all-time highs above the 100-dollar mark. However, we believe PepsiCo investors ought to be worried. As the Elliott Wave Principle will demonstrate on the chart below, the company’s shares could be on the verge of a crash.
Turns out the entire 7-year rally since the bottom in 2009 could be seen as a five-wave impulse. Impulses show the direction of the larger trend. Nevertheless, the Wave principle says that every impulse is followed by a three-wave correction in the opposite direction, before the larger trend resumes. If we apply this rule to the above-shown chart, we will see that once wave (5) of the uptrend is over, a decline of similar degree could be expected. In addition, the relative strength index is showing a double bearish divergence between the tops of waves 3, (3) and (5) of the sequence, which further supports the negative outlook.
Wave (5) has already exceeded the top of wave (3). So far, it appears to be taking the shape of an ending diagonal. PepsiCo might reach one last new high, but once the pattern is over, a “swift and sharp reversal” should follow. In the longer term, the stock could lose over 25%, which means the support area between 80.00 and 75.00 could be visited.
So, instead of highly optimistic, PepsiCo investors should be very careful, because such a sell-off in the company’s stock could ruin their entire portfolio.
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