Fed cuts rates for third time, but Powell signals higher bar for further cuts
The stock price of Align Technology (NASDAQ:ALGN) fell 36.6% on July 31st after the dental company posted Q2 results, which failed to impress Wall Street. Unfortunately for investors, that selloff was just the latest of many since ALGN reached an all-time high of $737 in September, 2021. Currently near $140 per share, the company’s valuation has dropped by 81% in less than four years.
The main reason for this crash is that sales remained flat over that time period, which removed investors’ motivation to pay the huge growth premium Align used to enjoy. So is the stock a good choice now at 17 times free cash flow amid increasing competition? That’s not an easy question, but a close examination of the Elliott Wave structure of the selloff from $737 gives reasons for optimism.
The daily chart above seems to be showing a clear A-B-C zigzag correction. Wave A is a textbook impulse pattern, marked (1)-(2)-(3)-(4)-(5), where two lower degrees of the trend are visible within wave (3). Wave C is labeled the same way, although it is a contracting ending diagonal, whose waves (1) and (3) consist of just three waves, marked a-b-c. Wave ‘b’ of (3) is a triangle correction.
The big downside gap of July 31st must be the fifth and final wave of the pattern. This, in turn, would mean that the entire decline from $737 is on the verge of completion. According to the theory, once a correction is over, the preceding trend resumes. If this count is correct, it is time for a notable bullish reversal in Align Tech stock.
That being said, ending diagonals are tricky patterns. Sometimes they turn out not to be diagonals at all. That’s why we’d rather wait for a recovery above $209 to confirm that this bullish setup can be relied on. For the less patient ones, understanding the business dynamics and competitive position of Align Tech is crucial.