The last time we wrote about Berkshire Hathaway was just over a year ago – on November 9th, 2015 – in an article called “Berkshire Hathaway Not Giving Up Yet”. At the time of writing the class B stock was trading slightly above 136 dollars a share after e decline from $153. Despite the recent weakness, we thought the dip was a good chance to join the uptrend, which was soon expected to resume. Our bullish opinion was not based merely on extrapolation. It was the result of careful Elliott Wave analysis of the weekly chart of Berkshire Hathaway given below.
As visible, the advance from $45 a share in 2009 was supposed to evolve into a five-wave impulse, since that is the pattern the market uses to progress while in a trend. Berkshire Hathaway’s wave (5) was still missing last November and therefore the stock was still expected to exceed the top of wave (3), once wave (4) ends. Knowing that this is the pattern the market was most likely to draw, we assumed buying the dip was a good strategy. Today is November 25th, 2016. It is also a good day to see how the company’s share price has been developing during the last 12 months.
Berkshire Hathaway Class B stock reached $159 this week. Yes, it initially fell to $123.46 in February, but did not even managed to touch the 38.2% Fibonacci level, not to speak the top of wave (1), so there was no reason to panic.
Now, “buy the dip” is a good strategy. The problem is it does not work forever. If it did, trading and investing would be child’s game. Unfortunately, every trend inevitable ends, which is why it is vital to know when NOT to buy the dip.
The Wave Principle postulates that every impulse is followed by a three-wave correction of similar degree in the opposite direction. In Berkshire’s case, wave (5) has already taken the stock above the top of wave (3), so chances are there is not much left of it. In addition, the relative strength index shows a strong bearish divergence between waves (3) and (5), thus further supporting the negative outlook.
Calling a top is risky business and we are not going to try it. In fact, it seems the bulls could still take the stock to $165-$170, but once they do, a major (A)-(B)-(C) decline is likely to begin. Even Buffett himself is not going to tell you that his company is immuned to the trials and tribulations of the market cycle. Because it is not. So, if this is the correct count, instead of celebrating the new all-time high and joining the bulls, investors would be better off to stay aside now. A decline back to the $120 area seems to be just around the corner.
