Eight months ago we made a case that Rapid7 investors should not expect the future to resemble the past. The stock was up 492% since February 2016 and was hovering above $53.50 in August, 2019. Without a doubt, the cyber-security industry was and still is enjoying a strong tailwind.
However, Rapid7’s daily chart revealed a worrying Elliott Wave pattern. It convinced us this was not the stock to bet on as a ~50% decline seemed highly likely. We shared our findings with readers on August 24th, 2019. Take a look below to refresh your memory.
The pattern in question was a five-wave impulse, labeled 1-2-3-4-5. The sub-waves of waves 3 and 5 were also visible. In addition, waves 2 and 4 obeyed the rule of alternation. Wave 2 as a flat correction, while wave 4 – a zigzag.
According to the theory, a three-wave correction follows every impulse. This meant that instead of buying the dip from $66 to $53, investors would be better off watching from a safe distance. A decline to the support area of wave 4 near $30 a share made a lot of sense in the summer of 2019. The updated chart below shows how things went.
The dip from $66 kept on until wave A reached a bottom at $42.83 in early-October, 2019. Then wave B gave the bulls plenty of false hopes by lifting the price to $64.26 in January, 2020. Whether wave C coincided with or was caused by the COVID-19 epidemic is hard to tell.
What matters is that it dragged Rapid7 stock to as low as $31.34 on March 16th. From the top of wave 5 to the bottom of wave C, the company lost 52.5% in market value. The good news is the 5-3 wave cycle looks complete now.
If this count is correct, the uptrend which had been in progress prior to July 2019 can be expected to resume. In the long-term, the wave structure suggests a new all-time high is on the cards. However, Rapid7 remains a money-losing company. Prospective investors must make sure they understand the risks associated with the specific 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!