Our regular readers often hear us say that it is never a good idea to pick tops and bottom. Even if the analysis turns out to be correct, predicting the exact level of a price reversal is next to impossible and not worth the risk. So, even if a clear five-wave impulse is in place, it is wise to wait for the reversal to actually occur before opening a position. Zoetis stock can serve as a good example of the merits of patience in trading and investing.
We first wrote about this leading animal medicine and vaccine producer in January, 2021. The stock was hovering around $162 a share and there was a complete impulse pattern on its weekly chart. According to the Elliott Wave theory, a three-wave correction was supposed to occur. Fortunately for the bulls, fifth waves sometimes extend.
By late-December, 2021, the stock was trading in the vicinity of $250 a share. Instead of being over at $177 in November, 2020, wave (5) evolved into an even bigger five-wave sequence. Its bigger size, however, didn’t change the overall structure of Zoetis’ path. In other words, it merely postponed the negative phase of the cycle without cancelling it.
The return of the bears couldn’t be postponed forever, though, and they seem to be in full control now. The post-2014 uptrend is still labeled (1)-(2)-(3)-(4)-(5), but this time the five sub-waves of both (3) and (5) are visible. Wave 5 of (5) ended at $249.27 on December 30th, 2021. Heading in 2022, it was time for a major correction.
Zoetis stock is down 30% from its record high six months ago. Unfortunately for investors, we don’t think the pain is over just yet. Extended fifth waves are usually fully retraced by the following correction. This means the recent weakness is likely to continue towards the support area of wave (4) near $100 a share. Not right away, though. A short-term bull trap rally in wave (b) can first occur. Take a look.
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A closer look at Zoetis’ drop from $249 to $154 reveals a five-wave impulse, labeled 1-2-3-4-5 in wave (a), whose wave 1 is a leading diagonal. This pattern not only confirms that the stock’s uptrend is finally over, but also prepares us for a corrective recovery in wave (b). If this count is correct, we can expect a surge towards the resistance near $200 a share, before the bears can return in wave (c) towards $100.
In other words, a recovery of about 15% from here is likely to be followed by a ~50% crash. And for those who don’t feel comfortable relying merely on a chart, consider that Zoetis trades at a 2022 P/E ratio of 34. This means the stock is far from cheap and likely to head south even without a bearish Elliott Wave pattern. The extension of the fifth wave gave the bulls another year, but their reign is now over. We have no plans to include ZTS in our stock portfolio any time soon.
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