The first time we wrote about The Trade Desk (NASDAQ:TTD) was in May 2019. The stock was in trading above $220 a share and we thought a notable correction can soon be expected. That call was rather premature though, since the bulls added another $100 before giving up. However, by March 2020, TTD was down to $136, losing 39% since we published our analysis.
But boy, what an entry point that low turned out to be. The Trade Desk surged to nearly $973 by December 2020, up 615% in nine months. Unfortunately for the bulls, 2021 didn’t start the same way 2020 ended. Ten days ago, the price dropped to $561 for a 42% correction. Before the opening bell on Monday, it is still down some $220 from the record. Should investors buy this dip?
The daily chart above puts the post-March 2020 surge and the following drop in Elliott Wave context. The surge from TTD’ very IPO in September 2016 looks like a five-wave impulse in progress. The pattern is labeled (1)-(2)-(3)-(4)-5), where the five sub-waves of wave (1) are also visible.
The Trade Desk Shareholder Must Not Let Complacency Settle In
The rally from $136 to $973 must be wave (3), meaning the drop to $561 is wave (4). What is missing is the final wave (5). Fifth waves usually exceed the top of the third wave, so we can expect the bulls to conquer $1000 and maybe even go for $1100.
Instead of throwing a party to celebrate the new top, however, shareholders should be careful. The Elliott Wave theory states that a three-wave correction follows every impulse. Furthermore, it often erases the entire fifth wave. If this count is correct, a bearish reversal near $1100 should be followed by a ~50% plunge back to the support of wave (4) near $550.
We’ve already seen this pattern cut the stocks of Brookfield Partners, Cigna (NYSE:CI), SEI Investments (NASDAQ:SEIC) and many others in half. Now it is sending the same warning about The Trade Desk. And let’s not forget that TTD comes with a forward P/E ratio of 133, which is quite expensive even for a fast grower.