Lockheed's (LMT) "Waterfall Decline" from Record Highs Fits Elliott Wave "Form" to a T
by Nico Isaac
Updated: June 05, 2023
This Memorial Day, I went to one of my favorite parks for a picnic when I saw, off in the far distance, a person walking around the 9-lane running track. Nothing new, except they were carrying a full-sized American Flag, pole and all, over their shoulder.
As I approached, I could make the person out as a young boy, no older than 14 and no heavier than 100 pounds, soaking wet. He was dressed in full camouflage army gear, with a loaded backpack, vest, and combat boots -- all in the 85-degree dead heat.
I asked him what he was doing, to which he replied in a voice stretching its pre-pubescent limits to be stern and formidable, but rising from a soft, ruddy-cheeked face:
"Yes ma'am," he said maintaining his pace. "I'm walking 20 laps to honor the 20 years we were in Afghanistan. After that, I'll turn around and do 6 more in the opposite direction, for the one's my father served."
I was caught dumb. My heart lifted and I felt compelled to hug him, but knew it was important to honor his composure. Any break in the rhythm he'd established would be unwelcome. And so, I simply said, "Thank you," and let him be.
This quest the boy had given himself served a multitude of purposes. From my point of view, it was a clear outward display of a whole, complex breadth of emotions. In its numbered order, it created a structure and framework to contain the formless words of a boy whose father spent much of his childhood at war.
In a way, the Elliott Wave Principle serves a similar purpose. It provides a structured framework to contain the seemingly uncontainable phenomena of unpredictable market moves and volatile investor emotions.
The Wave Principle, in fact, surmises that the broader emotional experience of investors is the fuel driving market trends. But that's just the beginning:
- Group psychology swings from excessive optimism to pessimism, and back again
- In the markets, group psychology forms repeating patterns in price charts
- Because these price patterns repeat, they are also predictable
- Once you know which of the 13 known Elliott wave patterns your market is in, you can make a probability-based forecasts as to what's next.
A beautiful example of this comes from the recent performance in military defense equipment and aerospace giant Lockheed Martin. Its stock, ticker symbol LMT, is also a Big Board heavyweight. And, in early April, the stock was on a tear, coming within reach and then hitting record highs.
But the "fundamental" frame surrounding LMT, the one that uses news events to gauge a stock's future, was far from organized. There was no discernible rhyme or rhythm to follow to a clear stance, as these headlines from the time recall:
- Bearish: "Lockheed Martin: Why It Might Be Better to Wait" April 14 Seeking Alpha
- Bullish: April 18 Seeking Alpha: "Lockheed Martin Stock: New All-Time Highs are Fully Warranted."
- Bearish: "China to Ban Imports and Exports by Lockheed Over Taiwan Arms Sales" April 14 Fox News
- Bullish: "LMT is my play, Lockheed Martin. The stock surging to a record high today on the heels of Q1 results that topped analysts' expectations." April 18 Reuters
But on April 11, our Trader's Classroom gave a clear form to Lockheed Martin's trend. There, analyst Robert Kelley identified a near complete ending diagonal Elliott wave pattern.
The paramount guidebook, Elliott Wave Principle -- Key to Market Behavior, defines the diagonal as a five-wave motive pattern "in which all the waves are 'threes,' producing an overall count of 3-3-3-3." Most important, diagonals are terminating patterns that can only form in the fifth wave position of an impulse, or as wave C of an ABC formation.
As terminating patterns, diagonals imply one thing: "dramatic reversal ahead."
(Pictured here: Diagonals preceding bearish and bullish reversals)
In the April 11 Trader's Classroom, Robert showed this labeled price chart of LMT, with the rising diagonal in plain view. Once complete, the stock's next move would be a powerful decline. From Trader's Classroom:
"If this is a diagonal as labeled, Elliott tells us when a diagonal is complete, you return quickly back down to the origin of the diagonal. So the advantage that Elliott wave gives us is, let's just say it gets up to $510 here and then we see a five wave decline on a 15-minute chart. That gives us a chance to bearish on this stock, placing a stop above the high of the move."
And, this is what followed: LMT continued higher until reaching its record peak on April 18. From there, the stock embarked on a $60-plus drop to 5-month lows on May 25.
Once again on May 25, our Trader's Classroom revisited Lockheed to illustrate the post-diagonal "waterfall decline" in this screenshot from the video lesson:
Of course, investing in any financial market carries risk, and Elliott wave analysis is far from fool-proof. It does, however, provide an organized framework for which to understand market behavior and minimize the risk involved when getting your investing and trading feet wet.
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