FICO Stock Looks Weak

In most countries, financial institutions use some kind of credit scores to better evaluate a borrower’s creditworthiness. In the United States, the FICO score, maintained by the Fair Isaac (NYSE:FICO), is used in over 90% of loan originations decisions.

So in essence, Fair Isaac holds a 90% market share in a service most lenders cannot do without. Couple that with the fact that this is a low-capex business and you get a recipe for a very promising investment. And indeed, FICO stock is up a staggering 4200% from its Financial Crisis bottom in 2009.

On the other hand, the share price is down 30% since July this year. The only question is, is this a buying opportunity or the start of a bigger selloff? Let’s try to find out with the help of Elliott Wave analysis.

The weekly chart above is a graphic representation of most of FICO ‘s history as a public company. It reveals both the 2008 crisis drop and the sharp 2020 selloff, as well as the spectacular rises that followed each of them.

From an Elliott Wave standpoint, the chart depicts a textbook five-wave impulse. The pattern is labeled I-II-III-IV-V, where the five sub-waves of wave III are also visible. The surge from $178 a share in March 2020 should then be wave V.

h2 Elliott Wave Correction in Progress/h2

According to the theory, a three-wave correction follows every impulse. And indeed, FICO stock is down 30% from its July all-time high of $554. Unfortunately for the bulls, the current pullback is still too shallow in relation to the impulse it corrects.

Besides, it looks like a single wave A, not a complete three-wave structure. Therefore, it makes sense to expect more weakness towards ~$250 in the months ahead. Now, let’s take a closer look at the daily chart below and see if it confirms the negative outlook.

A quick look at FICO ‘s fifth wave from up close is enough to label it as an ending diagonal. The pattern is labeled 1-though-5, where unlike in a regular impulse, waves 1, 3 and 5 have corrective a-b-c structures. The following bearish reversal to $370 so far reinforces the bearish outlook.

It can be seen as an impulse, marked 1-2-3-4-5 in wave A. If this count is correct, we can expect a short-lived recovery in wave B, followed by another wave of selling in C. Given the company’s market position, financial stability and steady growth rates, the anticipated drop would provide investors with a great buying opportunity. For now, however, we think it is wise to remain in a wait-and-see mode.

h2 FICO Stock as a Leading Economic Indicator/h2

Regardless of FICO ‘s business quality, the company remains cyclical. That is because it mostly serves financial institutions such as banks and credit card companies. They, in turn, tend to be a lot more careful with whom they lend to in a recession. This means the amount of loans issued declines, which translates into less business for FICO.

In a sense, FICO is among the first companies to know if the economy is slowing down. For example, during the Financial Crisis the general stock market did not start falling before October, 2007. FICO stock, on the other hand, topped as early as November, 2005, almost two years earlier.

Now, history may not repeat itself, but it often rhymes. With FICO down 30% from its record already, one might wonder if another crisis lurks around the corner…

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Written By: EWM Interactive