Ferrari (NYSE:RACE) is capable of incredible speeds and not just their cars. Ferrari N.V. held is NYSE initial public offering in October 2015 and after a decline to $31.66 per share in February 2016, the stock began an incredible rally. Two years later, the bulls reached a high of $130.63 for a 312% total gain, which translates into a compounded rate of return of 103.1% per year. In other words, Ferrari stock easily beat all major benchmark indices money managers compare their performance to. Does this mean it is time to add it to your portfolio?
The daily chart of Ferrari stock above shows its entire 2-year rally from the lows in February 2016. It is very impressive, indeed. Unfortunately, it looks like a textbook five-wave impulse pattern, whose wave 3 is extremely extended, which helps us see its sub-waves, as well. The problem is that according to the Elliott Wave Principle, a technical analysis method we use to stay ahead of market reversals, every impulse is followed by a correction of three waves in the opposite direction. In Ferrari stock’s case this means that instead of joining the bulls near $124 a share now, investors should proceed with great caution.
In addition to the wave count, the relative strength index shows a typical bearish divergence between waves 5 and 3, which is another reason not to buy Ferrari stock at current levels. The anticipated three-wave correction needs to retrace a respectable part of the preceding rally. If this count is correct, a decline to the $80 mark is very likely from now on, despite the company’s record-breaking business results in 2017.