According to Elliott Wave Theory, a 5 wave price action is followed by a three wave counter move against the previous trend. The most common retracement according to EWT and according to Fibonacci guidelines is the 61.8% level. Yahoo! Inc. (NASDAQ:YHOO)‘s share price has started a 5 wave decline since late 2014 and concluded it when markets bottomed last February. A clear 5 wave decline was complete. A three wave pull back was then needed as a counter trend rally. Price initially reached the 38% Fibonacci retracement of the decline and after a sideways consolidation phase (wave B) we saw an upside breakout labeled as wave C where the final upside would conclude. Price has already reached the 61.8% Fibonacci retracement.
In the shorter term if we zoom in we could see a reversal pattern unfolding off the $43-44 price level. The upside move from $37 is most probably over and thus wave C. This implies a new trend will be starting soon if not already started with target new lows. Price has started making lower lows and lower highs on a daily basis. Price has broken the neckline support of a possible Head and Shoulders pattern and combined with the negative divergence by the oscillators, we have several warning signals for Bulls to be cautious.
The $39-40 price level is an important support area that if broken, will confirm and validate my reversal signal. A break below the consolidation range of $37.50-34.50 will increase the chances of success of my bearish scenario dramatically. So is Yahoo! Inc. (NASDAQ:YHOO) heading for below $20? I believe the risk is worth taking and as the decline will unfold, I will be adding to my short position.
Thank you for taking the time to catch up on my thinking.
Disclosure: This article is written by Alexandros Yfantis and was originally published at trading2day. The author has a short position in YHOO.