Sales at online marketplace giant Etsy (NASDAQ:ETSY) are on track for a 33% gain in 2021 and are expected to add at least 20% more in 2022. The company is growing, profitable, and financially stable, yet the stock is down 46% from its November 2021 record of $307.75 a share.
Fortunately, Etsy ‘s crash is not a big surprise to our readers. Back in early-July, 2021, with the stock still below $200, we wrote that “Etsy aims for $300 before the bears cut the stock in half.”
While fundamentals and valuation certainly have their place in our arsenal, they alone cannot provide the tools needed for such predictions. After all, both undervalued and overvalued companies can stay that way for a long time.
What helped us navigate Etsy ‘s roller-coaster instead, was our Elliott Wave interpretation of the stock’s daily chart below.
Six months ago, this chart revealed that Etsy is likely to form a complete five-wave impulse. Waves I-through-IV were already in place, which meant one last push in wave V can lift the stock to a new record soon. On the other hand, the theory states that a three-wave correction follows every impulse.
Etsy stock to fall more than initially expected
We thought a bearish reversal near the $300 mark was likely to lead to a ~50% decline back to the support of wave IV. Regardless of the company’s quality and prospects, losing half your principle is something most investors would rather avoid. That’s exactly what Elliott Wave analysis helped us do here.
The stock price is already approaching the support of wave IV. What should be bothering the bulls, though, is the fact that this plunge doesn’t look like a three-wave structure. It looks more like a single wave. The problem is that corrections consist of three waves, not one.
Hence, we’ve labeled the current drop as only wave A within a larger A-B-C decline still in progress. Wave B can begin a notable recovery soon, but all its gains are likely to be erased by wave C. It appears we need to update our initial prediction for a 50% drop and prepare for 60% or even 70% in total. In other words, the bears remain in charge and we are on the sidelines.