When Covid-19 struck on US soil in the spring of 2020, it seemed to be the final nail in the already struggling retail sector’s coffin. With malls closed and people staying home across the country, discretionary spending was hit the hardest. Sales plunged for everything from jewelry to movie theaters to fishing and sports items. Dick’s Sporting Goods Inc., for instance, saw its revenue plummet by 30% in the quarter ending April, 2020. DKS stock fell below $13.50 in March, 2020.
But the quick realization that the Fed is going to do whatever it takes to keep the consumer and the economy healthy catapulted DKS stock to $147 in 2021. Then, just as investors started foreseeing a “new era” of perpetual strong post-pandemic demand, the inevitable inflation surge forced the Fed to jump on the brakes. By May, 2022, Dick’s Sporting Goods’ valuation had been cut by almost 60% to under $64 a share.
Then, somewhat miraculously, DKS surged to a new record of $153, despite no sales growth last year whatsoever. It seems like this stock can always find a way to reward investors, no matter how bleak things may look. Analysts and management expect company revenue to start growing again this year. Besides, record profitability makes the shares look like a bargain. So is it time to join the bulls and buy the dip at $125?
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According to the Elliott Wave analysis above, the short answer is No, it isn’t. The weekly chart reveals the stock’s entire progress since the company’s 2002 IPO. Unfortunately for the bulls, it shows a complete impulse pattern, which as per the theory should be followed by a three-wave correction.
The sequence begins with a leading diagonal, marked 1-2-3-4-5 in wave (1). It was followed by a clear A-B-C correction in wave (2), culminating in the Covid-19 panic of March, 2020. The strong and fast surge from under $14 to over $147 naturally fits in the position of wave (3). Then came the unusually deep wave (4), which erased 62% of wave (3), but still didn’t touch the top of wave (1). Wave (5) seems to have completed the pattern at $152.61 in March, 2023.
If this count is correct, it is time for a major retracement in DKS stock. Corrections usually erase the entire fifth wave, which translates into a decline back to ~$60 for Dick’s Sporting Goods. In addition, the MACD indicator reveals a strong bearish divergence between waves (3) and (5). We therefore think the seemingly low valuation is likely deceiving and DKS stock can tumble by roughly 50% again. After all, Hibbett Inc., a competitor of Dick’s, has been trading at a single-digit P/E for two years now. That didn’t prevent the stock from crashing by over 60% since November, 2021.
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