W-2-27-19

Wayfair Inc operates as an online store for the home good products in the United States. It offers a range of furniture, décor, decorative accent, housewares, seasonal décor, and other home good products. It’s a horrible business because on average it sells products 7% cheaper than it pays itself to the suppliers. That strategy let the company to grow the business fast at the expense of shareholders. The company lost money in 205, 2016, 2017, and every single quarter of 2018. The company has a substantial debt. It owes suppliers for the goods it has sold $650 mln and in addition it has a long term debt of $739 mln. That debt is partially offset by a pile of cash in amount of $849 mln. But as you can see the difference is negative and it is growing. It’s a textbook example of a business destroying shareholders value. It’s Net Assets have been negative since 2017. I would never invest in such a business. It’s a pure momentum play. And as we can see the fact that the business model is horrible does not preclude investors to keep pushing higher the stock. Because price on assets are driven by sentiment not by fundamentals or news. And as long as the textbook five wave fractal is not completed the stock may keep moving higher. And as the old adage says: “The market can stay irrational a lot longer than you can stay solvent!”. However, it does not justify your participation in that musical chair game.

Wayfair has been perfectly following the classic five wave up fractal since the beginning of 2015. The top at 147.80 reached in Sep 2018 was the top of the wave 3 up. Then a corrective wave 4 down bottomed at 76.60 in November 2018. This rally that so far has reached a high of 165.72 can be counted as wave A of 5. The wave A of 5 is never strong enough to ensure sustainable breakout over the top of preceding rally in the wave 3 up. In majority o cases it stalls a little bit under or over the top of the wave 3 up. And then we get a corrective decline in wave B of 5. It is always challenging to predict a depth of that correction as well as the path it may take. In general B of 5 should be structured as a-b-c move down. It may retrace anywhere from 38.2% to 61.8% or 76.4% or even go as deep as 85.4% or 90.2%. because in this particular case wave A of 5 was that strong so it could make a new higher high I think that upcoming corrective wave B of 5 down may not be very deep. For instance, it can drop to 125 filling out the gap up.

As soon as that expected correction down in wave B of 5 finds its bottom we should get another rally targeting a new all time high in the course of the final ave C of 5.

W - looks having topped in wave A of 5

W - daily chart updated on 27 February 2019