VMware Spinoff Didn’t Change Dell’s Wave Pattern
2022.05.22 10:30
The first time we wrote about Dell Technologies (NYSE:DELL) was on Oct. 21, 2021. The Elliott Wave structure suggested the stock was “trading in fifth and final wave.”
The price was hovering around $111 a share and we thought it might approach $130. Once there, however, a three-wave correction was supposed to erase a third of the company’s market value.
A decline back to $90 or less made sense.
Dell Technologies Daily Chart
The pattern was labeled 1-2-3-4-5, where the five sub-waves of wave 3 were also visible. According to the theory, a three-wave retracement follows every impulse.
So despite Dell’s seemingly low valuation, we thought a notable drop can be anticipated. In addition, there was a bearish MACD divergence between waves 3 and 5 supporting the negative outlook.
Ten days later, on Nov. 1, Dell spun off its 81% ownership in VMware (NYSE:VMW). To reflect the absence of the market value of this subsidiary, Dell’s valuation was also cut in half.
The price scale of the stock’s charts was also re-based, so the former $100 price level was now equal to $50. Our expectations for a bearish reversal near $130 now translated into expectations for one near $65.
Staying Ahead Of Dell’s 35% Plunge
The spinoff resulted in billions of cash for Dell that was planned to go to debt reduction. A lower debt load means more financial stability and flexibility. In other words, the deal made Dell a better company and all three major credit ratings agencies quickly recognized that fact.
Unfortunately for shareholders, however, the deal didn’t change the stock’s Elliott Wave pattern.
Dell Technologies Daily Chart
Dell didn’t even make it to $65 a share. The best the bulls could do was $61.54 on Feb. 10, 2022. Roughly three months later now, the stock closed at $40.05 on Friday, down 34.9% from its record.
Turns out that a good business and a cheap valuation mean nothing if there is a bearish Elliott Wave pattern.
In retrospect, there are plenty of reasons for Dell stock to decline. Inflation is merciless on low-margin businesses, China threats to replace foreign-branded computers with domestic versions, and the pandemic-fueled PC demand boom is waning.
Only Elliott Wave analysis put investors ahead of the crash, though, sparing them the troubles of finding explanations post-factum.
Now, it is impossible to know how deep a correction can get. That being said, a bullish reversal from the 61.8% Fibonacci level near $32 a share would be a very positive sign.
Can the charts prepare us for a rally when all looks bleak, just as they warned us about a selloff when all looked rosy?
