Paylocity Holding (NASDAQ:PCTY) provides cloud-based human capital and payroll management software solutions in the United States.
The company went public at $31 a share in 2014. By November 2021, the stock price had multiplied by more than ten to over $314 a share.
The last two and a half years, however, have been an utter disappointment following a 50%+ decline to $150 and change as of this writing.
It didn’t come out of the blue, though, as the chart below demonstrates.
Sometimes, what you thought was a complete impulse pattern turns out to be a sequence of first and second waves. In that case, instead of approaching the end of the fifth wave, we find ourselves in the middle of the third.
These situations can be quite frustrating, but they are also inevitable from time to time since no method is flawless. Every serious Elliott Wave analyst has to acknowledge and be aware of the principle’s shortcomings.
Fortunately, however, in most cases, the five-wave impulse is just that and it is followed by a three-wave correction. On its weekly chart above, Paylocity stock gives us a great example of what happens when you miss it.
The ten-fold surge from $31 to $314 can be seen as an impulse pattern, marked I-II-III-IV-V. Wave II coincided with the Covid-19 panic of February and March 2020. Wave III looks shorter than usual, but it is still longer than Wave I, price-wise. Wave V is longer than both I and III, but being the last of the impulse, it has been entirely erased by the following three-wave retracement.
What is interesting is the fact that the bear market from $314 to $130 wasn’t accompanied by some deterioration of the business fundamentals at Paylocity.
In fact, the company grew sales by 34% and 38% in 2022 and 2023, respectively. Another 20% rise is expected in the fiscal year ending June 2024. So, the only thing that could’ve warned investors in advance about the upcoming crash was the Elliott Wave principle.
The negative phase of the cycle can be seen as a simple A-B-C zigzag correction, whose wave C is an ending diagonal. The price just bounced off the 61.8% Fibonacci support level, where corrections usually end. If this count is correct, it is time for Paylocity stock to resume its long-term uptrend.
On the other hand, while Paylocity stock trades at a seemingly fair P/E ratio of ~24, further softening in the economy might delay the bulls’ return.
Unemployment has been creeping up for over a year now, which doesn’t bode well for a human capital and payroll management company. A rise above $185 would significantly improve the bullish odds.