Rapid7's Rapid Decline Plants Seeds For A Rally
EWM Interactive | Apr 26, 2020 03:49AM ET
Eight months ago we made a case that Rapid7 (NASDAQ:RPD) investors should not expect the future to resemble the past. The stock was up 492% since February 2016 and was hovering above $53.50 in August 2019. Without a doubt, the cyber-security industry was and still is enjoying a strong tailwind.
However, Rapid7’s daily chart revealed a worrying Elliott Wave pattern. It convinced us this was not the stock to bet on as a ~50% decline seemed highly likely. We shared our findings with readers on August 24th, 2019. Take a look below to refresh your memory.
The pattern in question was a five-wave impulse, labeled 1-2-3-4-5. The sub-waves of waves 3 and 5 were also visible. In addition, waves 2 and 4 obeyed the rule of alternation. Wave 2 as a flat correction, while wave 4 – a zigzag.
According to the theory, a three-wave correction follows every impulse. This meant that instead of buying the dip from $66 to $53, investors would be better off watching from a safe distance. A decline to the support area of wave 4 near $30 a share made a lot of sense in the summer of 2019. The updated chart below shows how things went.
The dip from $66 kept on until wave A reached a bottom at $42.83 in early-October, 2019. Then wave B gave the bulls plenty of false hopes by lifting the price to $64.26 in January, 2020. Whether wave C coincided with or was caused by the COVID-19 epidemic is hard to tell.
What matters is that it dragged Rapid7 stock to as low as $31.34 on March 16th. From the top of wave 5 to the bottom of wave C, the company lost 52.5% in market value. The good news is the 5-3 wave cycle looks complete now.
If this count is correct, the uptrend which had been in progress prior to July 2019 can be expected to resume. In the long-term, the wave structure suggests a new all-time high is on the cards. However, Rapid7 remains a money-losing company. Prospective investors must make sure they understand the risks associated with the specific business.
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