One of the advantages of Elliott Wave analysis is that its patterns look the same on all time-frames. Whether we talk about hourly or monthly charts, a complete five-wave impulse means we should expect a correction in the opposite direction. This allows us to make sensible predictions far into the future. The stock price of Nestle is a good example.
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We shared the chart above with readers more than four years ago, in May 2020. The stock has been on an upward trajectory for nearly two decades and even the losses suffered during the Covid-19 panic were mostly recouped in just over a month. However, the uptrend since 2003 looked like an almost complete impulse, marked (1)-(2)-(3)-(4)-(5). Waves (2) and (4) ended shortly after touching the 61.8% and 38.2% Fibonacci support levels, respectively. This pattern meant that instead of celebrating the anticipated new record in wave (5), investors should see it as a chance to evacuate.
But Nestle’s business was good at the time, so many probably thought that the rally was just getting started. Only those with an eye for Elliott Wave patterns could’ve seen the danger lurking ahead. Fast-forward to today, the company just lowered its financial guidance for the second time this year. Higher interest rates are eating into people’s budgets and driving them away from brand-name products such as Nestle’s. In the meantime, the stock is down by a third from its all-time high in 2022.
Wave (5) evolved into an ending diagonal pattern with a big throw-over to CHF 129.80, where the entire impulse ended and the corrective phase of the cycle began. Of course, the exact point of reversal was impossible to pinpoint, but knowing that a reversal was likely was worth the effort. As of this writing, Nestle stock is down 33.8% from that early-2022 record.
Now, while the decline to CHF 81.60 so far can be seen as a three-wave structure, we think it is only part of wave (a) of a much bigger correction. It would be unusual if the corrective phase of the cycle takes less than three years after the impulse phase took nineteen. Not to mention that even after the recent drop, Nestle still trades at a P/E of 20, which is expensive for a company growing revenues at low-single digits. So we think it is too early to go long-term bullish. Wave (b) might lift the stock to the resistance near CHF 110 a share, but those gains would then be erased completely in wave (c). Only then would the uptrend finally be ready to resume.
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