Based in Haifa, Israel, Plus500 (LON:PLUSP) (LSE:PLUS) operates a leading CFD trading platform. The company is part of the FTSE 250 index and conducts most of its business in Europe and Australia.
The new ESMA regulations which came in effect in August 2018 severely impacted the CFD trading industry. As a result, Plus500 stock fell from an all-time high of 2076 pence per share to as low as 397 by April 2019. However, the company quickly adapted to the changes.
The price has been trending up for the past year and hit 1470 following the company’s H1 2020 business update. Trading volumes increase in times of high market volatility so the Covid-19 crisis actually contributed to Plus500’s 268% surge in 15 months.
Plus500 Stock Bulls Need a Breather
Currently below 1300 pence per share, Plus500’s fundamentals seem stronger than ever. In addition, 2020 is shaping up as a record year for the CFD industry as a whole. Does this mean the stock is a buy right away? Let’s take a look at it from another angle.
The daily chart above visualizes the sharp plunge between August 2018 and April 2019. More importantly, it reveals that the following recovery is a textbook five-wave impulse. The pattern is labeled (1)-(2)-(3)-(4)-(5), where the sub-waves of wave (1) are also visible.
According to the Elliott Wave principle, this means two things: first, that Plus500 stock is in an uptrend; and two, that a three-wave correction can be expected before that uptrend resumes.
It is true that despite the recent strength, Plus500 still seems undervalued in terms of a low P/E ratio and a discount to conservative fair value estimates. However, if the count above is correct, it makes sense to expect a decline to 1000 – 900 GBp in the mid-term. Long positions in that area would provide a much better risk/reward ratio than currently available.