V Shape Recovery ?

V shape recovery !

These few words have appeared in social media, bloggers' post and analysts in recent days.  Putting aside whether it is index or individual stock, it is better to do a detail analysis before concluding it is so.

Above chart is one of the stock that have people talking about V shape recovery.  The name of the stock has to be blank off as this is not particularly analyzing the stock but rather on V shape recovery in general.

Black Label

The black line clearly shows a V shape.  Thus, if by looking at it, yes it is a V shape recovery.  In fact lot of claiming V shape recovery are just drawing that to support their claim.

Blue Label

Plain looking at trend line does not necessary translates into truth.  The blue label is an EW analysis.  The corrective wave A-B-C starting from price $2.48 to $1.46 indicates the correction is over.  Thus, whatever follows next is the new uptrend.  Based on this analysis yes one might conclude it is indeed V shape recovery. 

So confirm + chop V shape recovery !  Afraid answer is NO

Above is the Correction Calculator generated value for the A-B-C corrective wave.  Wave B is 65.9% wave A which is inline with guideline.  However, wave C is 197.7% wave A which is outside the guideline maximum value of 161.8%.  This has resulted in questionable validity in the EW count.  This is one of the purpose of the Elliott Wave Calculator (Fibonacci Calculator, Correction Calculator and Degree Calculator) that I've developed -- to help check blind spot in EW count.

So can we still confirm it is V shape recovery ?

Red Label

So, if isn't V shape recovery then what ?  Look at the Red labeling of the EW count in the above chart.  The fall from $2.48 to $1.46 (in the Blue Label case is A-B-C) works out to be a 5-wave structure ((i))-((ii))-((iii))-((iv))-((v)) which eventually forms the wave A of the corrective structure.  5-wave pattern in wave A is allowed as the most common zigzag pattern is of the 5-3-5 nature.  That means the rebound from $1.46 to $2.15 (as of 5th Jun 2020) is nothing but wave B of the ongoing correction only.  After wave B will be the last drop wave C.  So is it still V shape given it still have one more nasty and ugly drop which potentially will break below $1.46 ?

Above is generated from the Fibonacci Calculator to check and verify on the 5-wave wave A.  Wave ((ii)) is 65.9% wave ((i)) compared with the norm of 61.8%.  Wave ((iii)) is 181.8% wave ((i)) which fulfills the 161.8% guideline.  Wave ((iv)) is 48.7% wave ((iii)) which is more than the common 38.2% but is not a violation.  In fact, wave ((iv)) is allow to overlap wave ((i)) in corrective 5-wave pattern to form diagonal wave.  The golden ratio is 0.549 : 0.451 compares to the ideal case of 0.618 : 0.382.  That again is not a violation.  Thus, there isn't any EW violation to conclude the 5-wave pattern is invalid.

For wave B, a sub-level 5-wave pattern was spotted in forming wave ((a)).  The ongoing wave ((c)) so far is aligning to a 5-wave pattern with wave (iii) as the latest count.  Should a dip and a rise occur next, this will complete the wave (iv) and (v) resulting in a typical 5-3-5 pattern for wave B, which is a zigzag.  

From $1.46 to $2.15 is 47.26% increase within 3 months, how can not be V shape ?  Percentage rise is not the main thing in EW analysis trying to describe.  In EW guideline for zigzag correction pattern, wave B is typically between 38 to 79 percent wave A.  In the case of Flat pattern, it can even rise to more than 100% wave A (138.2% max).  The above chart clearly shows that at $2.15, it is more than 61.8% wave A but still below 79% wave A ($2.262 is 78.6% wave A to be exact).  Thus, even if the rebound continues to reach $2.26 it is still consider wave B.

From the high of $2.48 falling to $1.46 and rebound to current $2.15, the pattern is following the EW count closely which strongly contradict the V shape recovery analysis.

If putting in time frame or wave duration for wave degree as another considering factor, there is even more convincing that this wave count is correct.   

Alternate Analysis

Elliott Wave analysis might be difficult for most of the people as it is not as simple as keep labeling 1-2-3-4-5-A-B-C, there are rules and guidelines along the way to verify whether the wave count is correct.  So we revert to something common to most people to see whether is it still a V shape recovery.

Pattern recognition is probably the very first thing people get into when talking about Technical Analysis.  The Head-and-Shoulder, Inverted Head-and-Shoulder, Cup-with-Handle, the Ascending Triangle, the Descending Triangle, the Symmetrical Triangle, the Bull Flag, the Bear Flag, etc are those basic patterns TA practitioner will first look at.

The above suggests a Bear Flag could be in the forming.  Bear flag is a continuous pattern as after the formation of the flag, the next direction is to follow the preceding direction, that is down.  The flag portion is definitely moving within a parallel channel at the moment.  The increase in volume as the price fell from $2.48 to $1.46 is also a typical characteristic of the flag pole.  The rising channel which is a MUST for the bear flag is what we are having now.  However, during these periods, as the price rises, the volume fails to do so instead it is in declining fashion, a very characteristic feature for the flag portion.  Even without the knowledge of Flag, the observation of "as price rises, volume declines divergence" should be a big concern already.

Still a V shape recovery ?

Unless there isn't any convincing opposing analysis, it is just too early to jump into conclusion of a V shape recovery.

So next time when whoever said V shape recovery, better do a detail analysis to make sure there isn't any convincing opposing view else it will be just being throw from wall to wall by the stock market only.

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