IPOs: 'BeYoND' Ridiculous (Video)


-IPOs are often over-hyped and end up leaving many investors with a bad taste.

-A number of recent high profile IPOs are trading above their initial exchange prices.

-We have observed a very common pattern that most IPOs follow.

We have written a few articles before with Avi Gilburt about behaviors we have observed in new issues. For a long time in Stock Waves we completely ignored IPOs. Elliott Wave Theory is based on analyzing sentiment via price patterns and to recognize patterns and trends requires history. (EW is fractal so one could always zoom in and follow price action at much smaller degrees but we prefer to have some context of where that smaller action fits inside a much larger pattern.)

By 2015 though we started to notice that frequently after the initial hype wore off these new issues would get larger corrective fades taking them well below where they started on the exchanges.

(Video link)

In 2015 there were a few over-hyped offerings, namely Etsy (ETSY), Party City (PRTY), and Alibaba (NYSE:BABA) (in late 2014). These followed the expectations of our new-found "CABpIPO" pattern so perfectly that we were compelled to write the first article about it with Avi: "Why You Should Not Buy IPOs." We continued to track (and tag) this pattern as members requested charts for new issues. No longer shying away due to the lack of history, we began to project and anticipate the larger ABC decline. We lined up the proportionate legs based on reg EW and Fibonacci norms, and looked for ultimate targets around half of where the stocks started trading.

In June 2017 with Snap Inc. (SNAP) falling under its IPO price we thought it was a good time to update some of those "CABpIPO" charts. In that article - "Dear Avi: Should I Buy an IPO?" - we explored why this might happen with such alarming frequency. Namely, the requisite growth and interest for a company to have a "successful" IPO often puts it near the end of an Elliott Wave cycle, in a "5th wave."

Between the two ride-sharing services Uber (UBER) and Lyft (LYFT), and the fake meat company Beyond Meat (BYND), 2019 had plenty of high profile IPOs for us to keep tabs on. BYND soared out of the gate and within a few days doubled its IPO price. There are a few exceptions to the price pattern we have observed, but as exceptions go they often reinforce a rule by virtue of being exceptions. Is BYND going to be like the rare Google? Currently we are tracking a pattern that is consistent with the initial move higher we often see before the larger correction takes over, it is just more extreme on BYND. It can get even more ridiculous as the Ending Diagonal pattern it is following projects toward 150 so long as it holds support now in the 80 region. However, since it started trading at 45, the normal expected "CABpIPO" target once that ED completes is a devastatingly low 22.50.

(BYND chart)

As mentioned, the initial rise is common but not the crux of the pattern, and Uber and Lyft started dropping right away. UBER might have caught some support to retry the "initial" climb higher. It needs to hold 38 region for a bullish setup targeting 50s. This invalidates under 36, and since it came on the exchange around 41, we expect a price in the low 20s will eventually be seen. LYFT's lofty 88.50 debut saw a 46% draw-down so far. It can be attempting more of a corrective bounce, but even if that heads up toward 70 a "(C)" wave down could drag it under 44-40.

PagerDuty (PD) launched only this April. It climbed 64% over its initial 36 into the May high but that can count as five waves up. Under 45 starts to confirm the likely start of the large (A)(B)(C) pattern dragging it down toward 18. Zoom Video (ZM), also an April offering, hit a high thus far nearly 39% over 66, and is trying to hold a fifth wave here around 72.50 support allowing for one more high toward 100 before it begins the big fade targeting 33. Tradeweb Markets (TW), yet another name that IPOed in April this year, hit a high thus far up over 37% from the 34 level where it started. The current pattern matches closest the darling BYND and if support holds in the 40 region it could target 54+. But once that move completes or support fails we will be watching for the 17 region to be struck before considering a bigger bottom in place. Finally, Pinterest (PINS) hit the ground running in April too, jumping 56% off its 23 start into the end of the month but has already faded nearly all of that back. The current corrective path easily lines up with a longer term target for the low in the 11.50 region.

So should you buy an IPO? Usually it is not a good bet. Though once a pattern for more of the initial upside emerges, they can be fun to trade as long as one stays aware of support and the potential to break down into the larger normal corrective pattern. So limit risk to avoid biting off more than you can chew.

BYND - Primary Analysis - May-29 0956 AM (30 min)
BYND - Primary Analysis - May-29 0956 AM (30 min)
Zac Mannes is a senior analyst at ElliottWaveTrader.net and co-host of the site's Stock Waves service, which provides wave alerts and trade set-ups on individual stocks.