On June 14th, 2023, we wrote that Domino’s Pizza “may have finally found bottom.” The stock was trading just above $300 a share, down almost 50% from its 2021 all-time high. And despite a valuation that was still quite high, Elliott Wave analysis led us to believe that a notable recovery lies ahead. For educational purposes, let’s first take a look at the chart, which brought us to that conclusion. Then, we’ll examine the updated one for clues about what’s next.
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Domino’s daily price chart revealed that the crash from $568 looked like a simple A-B-C zigzag correction, with an ending diagonal in C. This is a reversal pattern, which implied that “we can anticipate a rally to the resistance near $400 a share.” The fact that there was a strong bullish divergence between the MACD indicator and the last four price lows only increased our optimism.
Just over seven months later now, Domino’s Pizza closed above $425 yesterday, after exceeding $432 earlier this month. In other words, the share price is up 39% since our bullish mid-June article. So far, so good, but as always, what has already happened is less interesting that what’s likely to happen next. Let’s see if the updated chart below can help us predict Domino’s next move, as well.
The first thing to notice is that we’ve changed the labeling of the decline from $568. Instead of an A-B-C zigzag with an ending diagonal in wave C, it is now marked as one big leading diagonal in wave A. This was always a possibility, whose likelihood has now increased due to two main reasons. One, we’re still skeptical that Domino’s can sustain its high valuation given its low sales growth rate.
And two, there is another MACD divergence between the last two highs, this time a bearish one. It suggests that the current recovery is likely corrective. We’ve therefore labeled it as a simple a-b-c zigzag in wave B. If this count is correct, we can expect wave ‘c’ of B to reach the 61.8% Fibonacci resistance level near $460. A bearish reversal for the start of wave C would then make sense.
Wave C is supposed to breach the bottom of wave A, putting targets below $280 on our radar. Assuming a reversal near $460, that’ll be a decline of more than 40%, bringing Domino’s valuation to much more reasonable levels. The company’s investors, however, probably won’t like the experience.
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