Pearson’s Tempting Risk/Reward Ratio
EWM Interactive | Jan 24, 2017 07:44AM ET
Shares of Pearson (LON:PSON), the world’s largest education company, founded in 1844, plunged by nearly 30% last week, after it announced intentions to cut dividends for the first time in over 25 years. The stock reached 817 pence on Monday, January 16th, but panicked selling on Tuesday caused a selloff to as low as 552 pence a share. Currently trading near 593 pence a share, it looks like nobody wants to get involved with Pearson anymore. However, history has taught us that such extremes often lead to spectacular reversals. Let’s see if we could expect one in Pearson stock.
The impulse “, on the price chart of the instrument in question. The chart above shows that Pearson’s uptrend from 420 in March, 2003, to 1517 pence a share twelve years later, in March, 2015, can easily be seen as impulsive. Furthermore, the sub-waves of wave (3) are also clearly visible.
But even if you find a five-wave sequence, you should not trade in its direction right away, because every impulse is followed by a three-wave correction in the opposite direction, before the larger trend resumes. That is exactly what we believe has been going on since the March 2015 top. It looks like Pearson’s retracement is a simple but deep (a)-(b)-(c) zig-zag in wave II/B. Now, the 5-3 wave cycle seems complete. Besides, one of the Wave Principle’s rules says that wave II/B cannot retrace 100% of wave I/A. In terms of price, this means that as long as the stock trades above the 420 pence a share bottom, the odds remain in favor of the bulls. The current situation seems to be offering us an investment opportunity with an extremely tempting risk/reward ratio, because wave III/C is supposed to exceed the top of wave I/A in the long-term. It looks like those who sold Pearson last week, might have done one of the biggest mistakes in their life.
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